Aggregate Consequences of Limited Contract Enforceability

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

doi:10.2139/ssrn.860785

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Aggregate Consequences of Limited Contract Enforceability

UPF Economics and Business Working Paper 843

37 Pages Posted: 30 Nov 2005

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)

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)

Ramon Marimon

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

There are 3 versions of this paper

Date Written: June 1999

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.

Keywords: Innovation, Enforcement, Aggregate fluctuations, Development, Financing Innovation

JEL Classification: E10, O11, O16, O40

Suggested Citation: Suggested Citation

Cooley, Thomas F. and Quadrini, Vincenzo and Marimon, Ramon, Aggregate Consequences of Limited Contract Enforceability (June 1999). UPF Economics and Business Working Paper 843, Available at SSRN: https://ssrn.com/abstract=860785 or http://dx.doi.org/10.2139/ssrn.860785