Debt contracts and cooperative improvements |
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| Affiliation: | 1. Department of Economics, University of Illinois, 1206 South 6th Street, Champaign, IL 61820, USA;2. Centro de Investigación Económica, ITAM, Ave. Camino Santa Teresa #930, D.F. 10700, México;3. Department of Economics, University of Illinois, 1206 South 6th Street, Champaign, IL 61820, USA;1. School of Management Engineering, Xi’an University of Finance and Economics, Xi’an Shaanxi, 710100, PR China;2. Department of Mathematics, Eastern Michigan University, Ypsilanti, MI 48197, USA;3. Department of Applied Mathematics, Northwestern Polytechnical University, Xi’an Shaanxi, 710129, PR China;4. Mathematics and Information College, Hebei Normal University, Shijiazhuang 050016, PR China |
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| Abstract: | In this paper, we consider a dynamic game with imperfect information between a borrower and lender who must write a contract to produce a consumption good. In order to analyze the game, we introduce the concept of a coalitional perfect Bayesian Nash equilibrium (cPBNE). We prove that equilibria exist and are efficient in a precise sense, and that deterministic contracts that resemble debt are optimal for a general class of economies. The cPBNE solution concept captures both the non-cooperative aspect of firm liquidation and the cooperative aspect of renegotiation. |
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