Aggregate Consequences of Limited Contract Enforceability

Cooley , Thomas F.; Marimon, Ramon; Quadrini, Vincenzo

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Aggregate Consequences of Limited Contract Enforceability

NBER Working Paper No. w10132

38 Pages Posted: 8 Dec 2003 Last revised: 9 Sep 2022

See all articles by Thomas F. Cooley

Thomas F. Cooley

New York University - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Ramon Marimon

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Vincenzo Quadrini

University of Southern California - Marshall School of Business - Finance and Business Economics Department; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

There are 3 versions of this paper

Date Written: December 2003

Abstract

We study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts. Because of enforceability problems, contracts are constrained efficient. We show that limited enforceability amplifies the impact of technological innovations on aggregate output. More generally, we show that lower enforceability of contracts will be associated with greater aggregate volatility. A key assumption for this result is that defaulting entrepreneurs are not excluded from the market.

Suggested Citation: Suggested Citation

Cooley, Thomas F. and Marimon, Ramon and Quadrini, Vincenzo, Aggregate Consequences of Limited Contract Enforceability (December 2003). NBER Working Paper No. w10132, Available at SSRN: https://ssrn.com/abstract=476089