This paper analyzes a dynamic lending relationship where the borrower cannot be forced to make repayments, and the lender offers long-term contracts that are imperfectly enforced and repeatedly renegotiated. No commitment and full commitment by the lender are special cases of this model where the probability of enforcement equals zero and one, respectively. I show that an increase in the degree of enforcement can lower social welfare. Furthermore, properties of equilibrium investment dynamics with partial commitment drastically differ from those with full and no commitment. In particular, investment is positively related to cash flow, consistent with empirical findings.
|Original language||English (US)|
|Number of pages||27|
|Journal||American Economic Review|
|State||Published - Dec 2013|
ASJC Scopus subject areas
- Economics and Econometrics
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Replication data for: Debt Contracts with Partial Commitment
Kovrijnykh, N. (Creator), ICPSR - Interuniversity Consortium for Political and Social Research, 2013
DOI: 10.3886/e112683, https://www.openicpsr.org/openicpsr/project/112683