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

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Debt
Optimal contract
Debt contracts
Enforcement
Monitoring
Bankruptcy
Leniency
Empirical evidence
Credit markets
Financing

Keywords

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

Cite this

Optimal debt contracts under costly enforcement. / Hvide, Hans K; Leite, Tore.

In: Economic Theory, Vol. 44, No. 1, 07.2010, p. 149-165.

Research output: Contribution to journalArticle

Hvide, Hans K ; Leite, Tore. / Optimal debt contracts under costly enforcement. In: Economic Theory. 2010 ; Vol. 44, No. 1. pp. 149-165.
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