31 Pages Posted: 5 Feb 2012 Last revised: 21 Mar 2012
Date Written: January 1, 2012
The impact of strong emotions or mood on decision making and risk taking is well recognized in behavioral economics and finance. Yet, and in spite of the immense interest, no study, so far, has provided any comprehensive evidence on the impact of such emotions on financial contracts and particularly on debt contracts. This paper provides the theoretical framework to study the impact of mood on financial contracting.
Keywords: mood effects, rank-dependent probabilities
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