Financial Contracting at the Boundary of a Firm

Posted: 19 Aug 2004

See all articles by Maciej Firla Cuchra

Maciej Firla Cuchra

University of Oxford - Department of Economics; Said Business School, University of Oxford; Oxford Economic Research Associates (OXERA) Consulting Ltd.

Date Written: August 2004

Abstract

We look at financial contracts determining boundaries of a firm. In the spirit of the incomplete contract theory, we construct a simple model to analyze the optimal allocations of control in financial contracts involving limits on managerial discretion and legal separation of different groups of assets. The model introduces a game-theoretic framework with uncertainty to consider the interplay between different groups of creditors and managers without recourse to the assumptions of asymmetric information. The results are optimality conditions for different contracts from asset-backed securities through project finance to debt with covenants vis-a-vis a standard debt contract. We also show how such departures of financing contracts into the boundaries of the firm can be welfare enhancing.

Keywords: securitizations, asset-backed securities, contracts, project finance

JEL Classification: G15, G21, G32, G33

Suggested Citation

Firla-Cuchra, Maciej T., Financial Contracting at the Boundary of a Firm (August 2004). Available at SSRN: https://ssrn.com/abstract=577941

Maciej T. Firla-Cuchra (Contact Author)

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

Said Business School, University of Oxford

Park End Street
Oxford, OX1 1HP
Great Britain

Oxford Economic Research Associates (OXERA) Consulting Ltd.

Alfred Street
Oxford OX1 4EH
United Kingdom

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