Exogenous Liquidity Supply in Presence of Repudiation Risk and Private Asset RecoveryInternational Financial Integration

Constantin Gurdgiev

Economic Papers from Trinity College Dublin, Economics Department

Abstract: Current paper proposes an extension of the seminal model by Holmstrom Tirole (1997) of the exogenous liquidity supply in presence of moral hazard to the case that includes private asset recovery under the limited liability of the entrepreneur. In our model partial private recovery applies to the financial assets that are considered to be sunk by the investors. In this context, a distressed firm seeking second round financing for its investment project is able, within a limited range of shocks, to increase its private payoff in case of the project default. As the result, unable to use these funds to raise additional liquidity, the distressed firms face a reduced range of acceptable shock values relative to Holmstrom Tirole set up. At the same time, domestic securities markets, even in absence of aggregate uncertainty, are shown to hold insufficient liquidity. As the result, distressed firms individually are unable to counter the shocks by holding claims against other firms even in case of the financial intermediation.

Date: 2003
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.tcd.ie/Economics/TEP/2003_papers/tepno7CG23.PDF (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tcd:tcduee:20037

Access Statistics for this paper

More papers in Economic Papers from Trinity College Dublin, Economics Department Contact information at EDIRC.
Bibliographic data for series maintained by Colette Angelov ().