A theory of debt maturity and innovation

Yuliyan Mitkov

Journal of Economic Theory, 2024, vol. 218, issue C

Abstract: The financing of innovative firms must balance two competing goals. First, the entrepreneur must be adequately protected from failure to encourage innovation. However, if the attempt to innovate fails, the entrepreneur's firm should be liquidated and its assets redeployed elsewhere. Meeting these two goals is inherently challenging when contracts are incomplete and shaped by ex-post renegotiation. I investigate how firms can choose the maturity of their debt to motivate innovation. The theory highlights a novel interaction between low-powered incentives, renegotiation, and debt maturity.

Keywords: Innovation; Debt; Incomplete contracts; Renegotiation (search for similar items in EconPapers)
JEL-codes: C78 D82 D86 G32 G33 O31 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:218:y:2024:i:c:s0022053124000346

DOI: 10.1016/j.jet.2024.105828

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