Shielding of Assets and Lending Contracts
24 Pages Posted: 11 Aug 2016 Last revised: 8 Sep 2016
Date Written: August 9, 2016
The primary means of enforcement of legal liabilities is through the seizure of debtors’ assets. However, debtors can shield their assets in various ways and thereby reduce the power of enforcement. This paper studies the circumstances under which a debtor would choose to shield assets and the value of assets that would be shielded.
A key idea is that borrower’s wealth mutes shielding incentives. Intuitively, avoiding debts through shielding requires that enough assets will be shielded, for else the debts can be collected from exposed assets. A wealthier debtor would thus need to shield more assets, and at a greater cost, than a debtor with limited wealth. Using this basic understanding, I develop a theory of asset shielding and explore its implications for incomplete lending contracts, explaining the role of equity agreements, equity cushions and collateral, and debt forgiveness, and explore the some of the policy implications.
Keywords: asset shielding, asset protection, hiding assets, lending contracts, credit rationing, moral hazard
JEL Classification: D11, D14, D21, D86, G32, K12, K42
Suggested Citation: Suggested Citation