Exogenous Liquidity Supply in Presence of Repudiation Risk and Private Asset Recovery

Trinity College Department of Economics Working Paper No. TEP 2003/7. Published in Proceedings of "Entrepreneurship and Macroeconomic Management", Vol. 1 (1), April 28-30, 2005

36 Pages Posted: 12 Mar 2008 Last revised: 16 Oct 2014

See all articles by Constantin Gurdgiev

Constantin Gurdgiev

Trinity College, Dublin; Middlebury Institute of International Studies at Monterey (MIIS)

Date Written: June 1, 2003

Abstract

Current paper proposes an extension of the seminal model by Holmstrom Tirole (1997) of the exogenous liquidity supply in presence of moral hazard to the case that includes private asset recovery under the limited liability of the entrepreneur. In our model partial private recovery applies to the financial assets that are considered to be sunk by the investors. In this context, a distressed firm seeking second round financing for its investment project is able, within a limited range of shocks, to increase its private payoff in case of the project default. As the result, unable to use these funds to raise additional liquidity, the distressed firms faces a reduced range of acceptable shock values relative to Holmstrom Tirole set up. At the same time, domestic securities markets, even in absence of aggregate uncertainty, are shown to hold insufficient liquidity. As the result, distressed firms individually are unable to counter the shocks by holding claims against other firms even in case of the financial intermediation.

Keywords: Investment, Asymmetric Information, Private Information, Repudiation Risk

JEL Classification: D82, E22, G33

Suggested Citation

Gurdgiev, Constantin, Exogenous Liquidity Supply in Presence of Repudiation Risk and Private Asset Recovery (June 1, 2003). Trinity College Department of Economics Working Paper No. TEP 2003/7. Published in Proceedings of "Entrepreneurship and Macroeconomic Management", Vol. 1 (1), April 28-30, 2005. Available at SSRN: https://ssrn.com/abstract=1105039 or http://dx.doi.org/10.2139/ssrn.1105039

Constantin Gurdgiev (Contact Author)

Trinity College, Dublin ( email )

Trinity College
Dublin 2

Middlebury Institute of International Studies at Monterey (MIIS) ( email )

460 Pierce St
Monterey, CA 93940
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
77
rank
294,853
Abstract Views
593
PlumX Metrics