Optimal debt contracts under costly enforcement |
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Authors: | Hans K Hvide Tore E Leite |
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Institution: | (1) London School of Economics, Houghton Street, London, WC2A 2AE, UK;(2) University of Essex, Wivenhoe Park, Colchester, CO4 3SQ, UK |
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Abstract: | We consider a financing game where monitoring is costly, non-contractible and allowed to be stochastic. The optimal contract,
which is debt, induces creditor leniency and strategic defaults on the equilibrium path, consistent with empirical evidence
on repayment and monitoring behavior in credit markets. Our paper is the first where the optimal contract is debt and default
is not synonymous with bankruptcy. |
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Keywords: | |
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