Equilibrium Default

Manuel Amador, Iván Werning, Hugo A. Hopenhayn and Mark Aguiar
Additional contact information
Manuel Amador: Federal Reserve Bank of Minneapolis
Hugo A. Hopenhayn: UCLA
Mark Aguiar: Princeton University

No 1539, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies the optimal financing of an investment project subject to the risk of default. A project needs outside funding from a lender, but the borrower can walk away at any moment and take some outside opportunity. The value of this opportunity is random and not observable by the lender. We show that the optimal dynamic contract may allow default along the equilibrium path. Focusing on the dynamics of default, debt and capital accumulation, we find that over the life of the project the probability of default declines, long-term debt falls and capital rises

Date: 2015
New Economics Papers: this item is included in nep-dge, nep-mic and nep-ppm
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:1539

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