Optimal Debt Contracts Under Costly Enforcement
25 Pages Posted: 18 Aug 2005 Last revised: 17 Apr 2008
There are 2 versions of this paper
Optimal Debt Contracts Under Costly Enforcement
Optimal Debt Contracts Under Costly Enforcement
Date Written: April 15, 2008
Abstract
We consider a financing game with costly enforcement based on Townsend (1979), but where monitoring is non-contractible and allowed to be stochastic. Debt is the optimal contract. Moreover, the debt contract induces creditor leniency and strategic defaults by the borrower on the equilibrium path, consistent with empirical evidence on repayment and monitoring behavior in credit markets.
Keywords: Costly state verification, debt contract, priority violation, strategic defaults
JEL Classification: D02, D82, G21, G33
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Managerial Compensation and Capital Structure
By Yossi Spiegel, Elazar Berkovitch, ...
-
Capital Structure Under Costly Enforcement
By Tore E. Leite and Hans K. Hvide
-
Capital Structure Under Imperfect Enforcement
By Hans K. Hvide and Tore E. Leite
-
Optimal Debt Contracts Under Costly Enforcement
By Hans K. Hvide and Tore E. Leite
-
Start-Up Financing: Outside Equity
By Hans K. Hvide and Aksel Mjøs