Aggregate Consequences of Limited Contract Enforceability

Thomas Cooley, Ramon Marimon and Vincenzo Quadrini

No 4173, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts. Because of enforceability problems, contracts are constrained efficient. We show that limited enforceability amplifies the impact of technological innovations on aggregate output. More generally, we show that lower enforceability of contracts will be associated with greater aggregate volatility. A key assumption for this result is that defaulting entrepreneurs are not excluded from the market.

Keywords: G00; Contract enforceability; Aggregate volatility; Amplification (search for similar items in EconPapers)
JEL-codes: E30 (search for similar items in EconPapers)
Date: 2004-01
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (239)

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Journal Article: Aggregate Consequences of Limited Contract Enforceability (2004)
Working Paper: Aggregate Consequences of Limited Contract Enforceability (2003)
Working Paper: Aggregate consequences of limited contract enforceability (2003)
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