Abstract This paper studies the macroeconomic effects of capital reallocation with financial shocks. I develop a model in which firms face borrowing constraints, idiosyncratic productivity shocks, and liquidation costs. The risks costs generate an option value staying business delay for unproductive firms. A new feature arises from delay. Unproductive that are not liquidated increase their leve...

Using a four-round panel dataset from Kagera, Tanzania, we examine whether households that suffer a death engage in precautionary savings to smooth consumption over the crisis. Under Deaton’s buffer-stock hypothesis, savings equal the present value of future falls in income. In that case, we should see greater accumulation of assets among households which anticipate a death, and liquidation of ...

We analyze optimal financial contracts when the specificity of investments is endogenous. Specialization decreases the liquidation value of assets, but it also improves the project’s long term productivity. While the first effect is known to make financing more difficult, we show that the second effect can ease financing constraints and increase financing capacity by improving an entrepreneur’s...

While the bankruptcy framework introduced in the seminal work of Bulow & Shoven, later extended by White, has been the foundation for theoretical work in the area for the last 20 years, it has never been empirically tested. The paper empirically examines the Bulow-Shoven-White framework using micro data on 640 bankrupt firms in Canada. Results are generally supportive of the Bulow-Shoven-White ...

When resources are divided among agents, the characteristics of the agents are taken into consideration. A simple example is the bankruptcy problem, where the liquidation value of a bankrupt firm is divided among the creditors based on their claims. We characterize division rules under which no group of agents can increase the total amount they receive by transferring their characteristics with...

We analyze the nature of financial contracting when an entrepreneur can choose the specificity of investments and financial contracts are incomplete. Investing in projectspecific assets increases productivity but decreases liquidation value. This creates a strategic incentive to specialize assets to decrease the bargaining power of the financier when debt financing is used. By contrast, equity ...

A theoretical model examines real investment decisions during bankruptcy reorganization and the closing distribution of property rights over capital structure to creditors and equityholders. Estate value is uncertain. Risky real investment levels in firm technology are endogenous and subject to financing constraints with interest rates sensitive to the probability of default and expected credit...