Renegotiation‐proof Labour and Credit Contracts with Worker Mobility

Theofanis Tsoulouhas

Economica, 1999, vol. 66, issue 264, 434-454

Abstract: This paper investigates the interaction between a privately informed firm’s contracts for labour and its contracts for credit. The analysis shows that if the worker has no ex post outside opportunities, or if the liquidation value of the firm is large, then the credit contract can always be state‐independent; if the worker has outside opportunities and the liquidation value is small, then the credit contract must be state‐dependent. However, if the worker is unable to precommit not to renegotiate with the firm, then the credit contract must be state‐independent to ensure renegotiation‐proofness and protect the interests of the creditor. This leads to credit rationing and under‐investment.

Date: 1999
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