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Debt Contracts with Partial Commitment

Resource type
Author/contributor
Title
Debt Contracts with Partial Commitment
Abstract
This paper analyzes a dynamic lending relationship where the borrowercannot be forced to make repayments, and the lender offerslong-term contracts that are imperfectly enforced and repeatedlyrenegotiated. No commitment and full commitment by the lenderare special cases of this model where the probability of enforcementequals zero and one, respectively. I show that an increase inthe degree of enforcement can lower social welfare. Furthermore,properties of equilibrium investment dynamics with partial commitmentdrastically differ from those with full and no commitment. Inparticular, investment is positively related to cash flow, consistentwith empirical findings.
Publication
American Economic Review
Volume
103
Issue
7
Pages
2848-74
Date
2013-12
Citation
Kovrijnykh, N. (2013). Debt Contracts with Partial Commitment. American Economic Review, 103, 2848–2874.
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