Optimal contracts under imperfect enforcement revisited
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Date
2005-08Metadata
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- Discussion papers (FOR) [556]
Abstract
We consider a financing game with costly enforcement based on Townsend (1979), but where monitoring is non-contractible and allowed to be stochastic. Debt is the optimal contract. Moreover, the debt contract induces creditor leniency and strategic defaults by the borrower on the equilibrium path, consistent with empirical evidence on repayment and monitoring behavior in credit markets.
Publisher
Norwegian School of Economics and Business Administration. Department of Finance and Management ScienceSeries
Discussion paper2005:4