Working it out: Randomized Modification and Entrepreneurial Effort in a Collateralized Debt Market

Christopher Eaglin, Apoorv Gupta, Filippo Mezzanotti and Jonathan Zinman

No 34398, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We enrich a standard debt overhang model with liquidity constraints to guide the design and interpretation of a collateralized debt modification experiment on a publicly traded lender’s delinquent vehicle loans to minibus entrepreneurs. Liquidity constraints add another borrower incentive compatibility constraint that interacts with debt overhang to shape repayment and effort. Consistent with model predictions, we find: debt reduction does not affect liquidity constrained borrowers; payment reduction improves both repayment and effort for borrowers with sufficient vehicle equity; payment reduction induces repayment without effort increases for low-equity borrowers. These results suggest a pecking order strategy for modification practice and policy.

JEL-codes: G23 G31 O16 (search for similar items in EconPapers)
Date: 2025-10
New Economics Papers: this item is included in nep-cfn and nep-exp
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