A Model of Dynamic Liquidity Contracts

Onur Ozgur

Cahiers de recherche from Centre interuniversitaire de recherche en économie quantitative, CIREQ

Abstract: I study long-term financial contracts between lenders and borrowers in the absence of perfect enforceability and when both parties are credit constrained. Borrowers repeatedly have projects to undertake and need external financing. Lenders can commit to contractual agreements whereas borrowers can renege any period. I show that equilibrium contracts feature interesting dynamics: the economy exhibits efficient investment cycles; absence of perfect enforcement and shortage of capital skew the cycles toward states of liquidity drought; credit is rationed if either the lender has too little capital or if the borrower has too little collateral. This paper's technical contribution is its demonstration of the existence and characterization of financial contracts that are solutions to a non-convex dynamic programming problem.

Keywords: Credit rationing; credit cycles; default; limited capital; liquidity (search for similar items in EconPapers)
JEL-codes: C6 C7 D9 G2 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2011
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Related works:
Working Paper: A Model of Dynamic Liquidity Contracts (2011)
Working Paper: A Model of Dynamic Liquidity Contracts (2005)
Working Paper: A Model of Dynamic Liquidity Contracts (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:mtl:montec:07-2011

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