How Recovery Process Influences the Design of Debt Contracts?

Régis Blazy and Laurent Weill

LSF Research Working Paper Series from Luxembourg School of Finance, University of Luxembourg

Abstract: Literature on ex-ante efficiency of bankruptcy procedures investigates how these procedures influence the behavior of managers and creditors. We extend this literature by explaining how bankruptcy law can influence the design of debt contracts through the recovery process. We develop a model of a lending relationship with moral hazard with an active bank taking a decision regarding the continuation or the liquidation of the borrower in case of default. We show the impact of the recovery process on the design of debt contracts (loan rate, collateralized percentage of the loan).

Keywords: Bankruptcy; Collateral; Debt Contract. (search for similar items in EconPapers)
JEL-codes: G21 G33 (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:crf:wpaper:06-08

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