Is There a Paradox of Pledgeability?
12 Pages Posted: 19 Nov 2019 Last revised: 30 Dec 2019
Date Written: December 30, 2019
Donaldson, Gromb and Piacentino (2019) suggest that, in the presence of limited commitment, increasing the fraction of a firm’s cash flows that can be pledged as collateral might make the firm worse off. We show that, in fact, firms can never be hurt by increased pledgeability of cash flows in their framework. We then show that the first best can always be implemented by non-state contingent collateralized debt contracts that differ from the ones they consider.
Keywords: Collateral, Secured debt, Pledgeability
JEL Classification: G21, G32, G33, G38
Suggested Citation: Suggested Citation