Advances in Financial Leasing Mechanism Designs

Lucianna Cananà, Luigi De Cesare and Massimiliano Ferrara ()
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Lucianna Cananà: Dipartimento Jonico in “Sistemi Giuridici ed Economici del Mediterraneo: Società, Ambiente, Culture”, Università di Bari, Via Lago Maggiore Angolo Via Ancona, 74121 Taranto, Italy
Luigi De Cesare: Dipartimento di Economia, Università di Foggia, Via Caggese, 1, 71121 Foggia, Italy
Massimiliano Ferrara: Dipartimento di Giurisprudenza, Economia e Scienze Umane, Università Mediterranea di Reggio Calabria, 89124 Reggio Calabria, Italy

Mathematics, 2022, vol. 11, issue 1, 1-10

Abstract: Financial leasing contracts usually include specific clauses for early termination of the agreement in the event that the lessee defaults. The lessor might, therefore, not immediately ask for termination of the financial lease agreement in order to take advantage of the increment in fees accrued due to the default interest. The analysis presented in this work aims to find the conditions determining the optimal time to rescind the contract, when the arrears’ interest rate is higher than the outstanding fees’ interest rate established in the contract and when the return of alternative investments is deterministic. In this paper, we study the optimal time for advanced termination of a leasing contract to maximize the wealth of the lessor against the natural expiry of the contract. We prove that the optimal time can be found through the intersection of the instantaneous force of interest of a lessor’s credit at a certain date and the instantaneous force of interest of the opportunity cost of capital, or at the initial date or maturity date. To this end, we provide a detailed list of cases in which it is appropriate to terminate the contract or not. The problem is formulated in the case where the opportunity cost follows deterministic and semi-deterministic dynamics.

Keywords: leasing; rescinding contracts; economic decision analysis (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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