Working it out: Randomized Modification and Entrepreneurial Effort in a Collateralized Debt Market

Christopher Eaglin, Apoorv Gupta, Filippo Mezzanotti and Jonathan Zinman

No 34398, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We conduct a collateralized debt modification experiment on a large lender’s nonperforming loans to minibus entrepreneurs, guiding its design and interpretation by adding liquidity constraints to a standard debt contracting model with strategic incentives. Liquidity constraints add another borrower incentive compatibility constraint that interacts with strategic motives to shape repayment and effort. The model predicts specific conditions under which different contracting approaches will be (in)effective at changing borrower behavior, collateral actually worsens incentive alignment, and borrower repayment and effort responses will diverge. Empirical results are consistent with model predictions and suggest a pecking order strategy for modification practice and policy.

JEL-codes: G23 G31 O16 (search for similar items in EconPapers)
Date: 2025-10
New Economics Papers: this item is included in nep-cfn and nep-exp
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