Optimal Debt Contracts under Costly Enforcement

Hans Hvide and Tore Leite

No 6040, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 behaviour in credit markets.

Keywords: Costly state verification; debt contract; priority violation; strategic defaults (search for similar items in EconPapers)
JEL-codes: D02 D82 G21 G33 (search for similar items in EconPapers)
Date: 2007-01
View list of references

Downloads: (external link)
http://www.cepr.org/pubs/dps/DP6040.asp (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:cpr:ceprdp:6040

Ordering information: This working paper can be ordered from
http://www.cepr.org/pubs/dps/DP6040.asp

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers
Address: Centre for Economic Policy Research, 53--56 Great Sutton Street, London EC1V 0DG
Series data maintained by ().