The commitment value of financial contracts is limited by the ability of contracting parties to renegotiate them away, if it becomes mutually beneficial to do so. When debt contracts are used by oligopolistic firms to commit to aggressive output strategies as in Brander-Lewis, we show that renegotiation may undermine commitment under symmetric information, but not generally under asymmetric information. Lasting contracts that survive renegotiation are proposed. It is shown that there exist lasting debt contracts which preserve the commitment value and in which not all debt is renegotiated away.

In this paper we analyze how depositors can employ both monitoring and capital requirements to control the risk of bank assets. We also analyze how monitors should be compensated if their actions are not directly observable and if there are binding limits on their liability. Second-best capital and monitoring levels (with unobservable actions) will be distorted away from their respective first-best levels. We derive some results about the nature of these distortions and characterize the optimal incentive scheme for monitors.