Aggregate Consequences of Limited Contract Enforceability
UPF Economics and Business Working Paper 843
37 Pages Posted: 30 Nov 2005
Date Written: June 1999
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.
Keywords: Innovation, Enforcement, Aggregate fluctuations, Development, Financing Innovation
JEL Classification: E10, O11, O16, O40
Suggested Citation: Suggested Citation