Legal enforcement, default and heterogeneity of project-financing contracts

Financial Contracts and Enforcement

(a) (Limited) Commitment and renegotiation (b) Payments and enforcement are chosen optimally as part of a PBNE (c) Information revelation (d) Stochastic versus deterministic contracts (debt is optimal when commitment is limited) 3. Enforcement and firm finance: Krasa, Sharma and Villamil [7] (a) The model (b) The effect of c on firm finance (c) The effect of η on firm finance

Contract Enforcement and Firms’ Financing

This paper studies how the degree of contract enforcement in a country influences firms’ financing decisions. We first document empirical facts on debt financing for two new firm-level datasets in the United Kingdom and Ecuador. In the United Kingdom, small firms borrow more relative to their assets than large firms, whereas in Ecuador small firms borrow less. We build a dynamic model of firms’...

Financing Constraints and Relational Contracts∗

We consider a model in which a principal must both repay a loan and motivate an agent to work hard. Output is non-contractible, so the principal faces a commitment problem with both her creditor and her agent. In a profit-maximizing equilibrium, the agent’s productivity is initially low and increases over time. Productivity continues increasing even after the debt has been repaid, eventually co...

Legal Enforcement of Morality

Enforcement, Incomplete Contracts, and Recessions

This paper studies the link between enforcement in financial contracts and output volatility. In particular we study how cycles and importantly recessions can be amplified in economies with weak contract enforcement. The idea of the paper is that firms in economies with enforcement problems will not be able to have the optimal scale of production because investors cannot enforce the collection ...