A Theory of Debt Based on the Inalienability of Human Capital
62 Pages Posted: 28 Dec 2006 Last revised: 9 Sep 2010
Date Written: November 1991
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: Suggested Citation