Is There a Paradox of Pledgeability?

12 Pages Posted: 19 Nov 2019 Last revised: 30 Dec 2019

See all articles by Dan Bernhardt

Dan Bernhardt

University of Illinois at Urbana-Champaign - Department of Economics

Kostas Koufopoulos

affiliation not provided to SSRN

Giulio Trigilia

University of Rochester - Simon Business School

Date Written: December 30, 2019

Abstract

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

Bernhardt, Dan and Koufopoulos, Kostas and Trigilia, Giulio, Is There a Paradox of Pledgeability? (December 30, 2019). Available at SSRN: https://ssrn.com/abstract=3481721 or http://dx.doi.org/10.2139/ssrn.3481721

Dan Bernhardt

University of Illinois at Urbana-Champaign - Department of Economics ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-5708 (Phone)

Kostas Koufopoulos

affiliation not provided to SSRN

Giulio Trigilia (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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