Optimal financial contracting and the effects of firm's size
Eva Ropero and
Alessandro T. Villa
RAND Journal of Economics, 2021, vol. 52, issue 2, 446-467
We consider the design of the optimal dynamic policy for a firm subject to moral hazard problems. With respect to the existing literature we enrich the model by introducing durable capital with partial irreversibility, which makes the size of the firm a state variable. This allows us to analyze the role of firm's size, separately from age and financial structure. We show that a higher level of capital decreases the probability of liquidation and increases the future size of the firm. Although analytical results are not available, we show through simulations that, conditional on size, the rate of growth of the firm, its variability, and the variability of the probability of liquidation decline with age.
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:bla:randje:v:52:y:2021:i:2:p:446-467
Ordering information: This journal article can be ordered from
http://www.blackwell ... al.asp?ref=0741-6261
Access Statistics for this article
RAND Journal of Economics is currently edited by James Hosek
More articles in RAND Journal of Economics from RAND Corporation Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().