Optimal debt contracts under costly enforcement

Hans K Hvide, Tore Leite

Research output: Contribution to journalArticle

8 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)149-165
Number of pages17
JournalEconomic Theory
Volume44
Issue number1
Early online date23 Apr 2009
DOIs
Publication statusPublished - Jul 2010

Keywords

  • costly state verification
  • debt contract
  • priority violation
  • strategic defaults

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