Aggregate Consequences of Limited Contract Enforceability

Posted: 8 Jul 2004

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)

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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. This implies that economies with lower enforceability of contracts are characterized by greater macroeconomic volatility. A key assumption for the amplification result is that defaulting entrepreneurs are not excluded from the market.

Suggested Citation

Cooley, Thomas F. and Marimon, Ramon and Quadrini, Vincenzo, Aggregate Consequences of Limited Contract Enforceability. Journal of Political Economy, Vol. 112, pp. 817-847, August 2004. Available at SSRN: https://ssrn.com/abstract=562406

Thomas F. Cooley

New York University - Leonard N. Stern School of Business ( email )

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Ramon Marimon

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Vincenzo Quadrini (Contact Author)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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