A Theory of Debt Based on the Inalienability of Human Capital

62 Pages Posted: 28 Dec 2006 Last revised: 9 Sep 2010

See all articles by Oliver Hart

Oliver Hart

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

John Moore

University of Edinburgh - Economics; London School of Economics

Date Written: November 1991

Abstract

Consider an entrepreneur who needs to raise funds from an investor, but cannot commit not to withdraw his human capital from the project. The possibility of a default or quit puts an upper bound on the total future indebtedness from the entrepreneur to the investor at any date. We characterize the optimal repayment path and show how it is affected both by the maturity structure of the project return stream and by the durability and specificity of project assets. Our results are consistent with the conventional wisdom about what determines the maturity structure of (long-term) debt contracts.

Suggested Citation

Hart, Oliver D. and Moore, John Hardman, A Theory of Debt Based on the Inalienability of Human Capital (November 1991). NBER Working Paper No. w3906, Available at SSRN: https://ssrn.com/abstract=474008

Oliver D. Hart (Contact Author)

Harvard University - Department of Economics ( email )

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European Corporate Governance Institute (ECGI) ( email )

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John Hardman Moore

University of Edinburgh - Economics ( email )

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London School of Economics ( email )

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