Debt contracts and cooperative improvements

Stefan Krasa; Tridib Sharma; Anne P. Villamil

doi:10.1016/j.jmateco.2004.04.002

Debt contracts and cooperative improvements

Stefan Krasa, Tridib Sharma, Anne P. Villamil

Economics

Research output: Contribution to journal › Article › peer-review

Abstract

In this paper, we consider a dynamic game with imperfect information between a borrower and lender who must write a contract to produce a consumption good. In order to analyze the game, we introduce the concept of a coalitional perfect Bayesian Nash equilibrium (cPBNE). We prove that equilibria exist and are efficient in a precise sense, and that deterministic contracts that resemble debt are optimal for a general class of economies. The cPBNE solution concept captures both the non-cooperative aspect of firm liquidation and the cooperative aspect of renegotiation.

Original language	English (US)
Pages (from-to)	857-874
Number of pages	18
Journal	Journal of Mathematical Economics
Volume	41
Issue number	7
DOIs	https://doi.org/10.1016/j.jmateco.2004.04.002
State	Published - Nov 2005

Keywords

Bankruptcy
Cooperative and non-cooperative games
Debt contract
Efficiency
Enforcement
Fairness
Incomplete information
Liquidation
Renegotiation

ASJC Scopus subject areas

Economics and Econometrics
Applied Mathematics

Online availability

10.1016/j.jmateco.2004.04.002

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@article{c15e327931104ced877dc805be9c2741,

title = "Debt contracts and cooperative improvements",

abstract = "In this paper, we consider a dynamic game with imperfect information between a borrower and lender who must write a contract to produce a consumption good. In order to analyze the game, we introduce the concept of a coalitional perfect Bayesian Nash equilibrium (cPBNE). We prove that equilibria exist and are efficient in a precise sense, and that deterministic contracts that resemble debt are optimal for a general class of economies. The cPBNE solution concept captures both the non-cooperative aspect of firm liquidation and the cooperative aspect of renegotiation.",

keywords = "Bankruptcy, Cooperative and non-cooperative games, Debt contract, Efficiency, Enforcement, Fairness, Incomplete information, Liquidation, Renegotiation",

author = "Stefan Krasa and Tridib Sharma and Villamil, {Anne P.}",

note = "Funding Information: We thank Shurojit Chatterji, Chanho Park, Ludovic Renou, Nicholas Yannelis and an anonymous referee for useful comments. Krasa and Villamil gratefully acknowledge financial support from National Science Foundation grant SES-031839 and the Center for Private Equity Research at the University of Illinois. Sharma gratefully acknowledges financial support from the Asociaci{\'o}n M{\'e}xicana de Cultura. Any opinions, findings, and conclusions or recommendations expressed in this paper are those of the authors and do not necessarily reflect the views of the National Science Foundation or any other organization. ",

year = "2005",

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pages = "857--874",

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AU - Krasa, Stefan

AU - Sharma, Tridib

AU - Villamil, Anne P.

N1 - Funding Information: We thank Shurojit Chatterji, Chanho Park, Ludovic Renou, Nicholas Yannelis and an anonymous referee for useful comments. Krasa and Villamil gratefully acknowledge financial support from National Science Foundation grant SES-031839 and the Center for Private Equity Research at the University of Illinois. Sharma gratefully acknowledges financial support from the Asociación Méxicana de Cultura. Any opinions, findings, and conclusions or recommendations expressed in this paper are those of the authors and do not necessarily reflect the views of the National Science Foundation or any other organization.

PY - 2005/11

Y1 - 2005/11

N2 - In this paper, we consider a dynamic game with imperfect information between a borrower and lender who must write a contract to produce a consumption good. In order to analyze the game, we introduce the concept of a coalitional perfect Bayesian Nash equilibrium (cPBNE). We prove that equilibria exist and are efficient in a precise sense, and that deterministic contracts that resemble debt are optimal for a general class of economies. The cPBNE solution concept captures both the non-cooperative aspect of firm liquidation and the cooperative aspect of renegotiation.

AB - In this paper, we consider a dynamic game with imperfect information between a borrower and lender who must write a contract to produce a consumption good. In order to analyze the game, we introduce the concept of a coalitional perfect Bayesian Nash equilibrium (cPBNE). We prove that equilibria exist and are efficient in a precise sense, and that deterministic contracts that resemble debt are optimal for a general class of economies. The cPBNE solution concept captures both the non-cooperative aspect of firm liquidation and the cooperative aspect of renegotiation.

KW - Bankruptcy

KW - Cooperative and non-cooperative games

KW - Debt contract

KW - Efficiency

KW - Enforcement

KW - Fairness

KW - Incomplete information

KW - Liquidation

KW - Renegotiation

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DO - 10.1016/j.jmateco.2004.04.002

M3 - Article

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SN - 0304-4068

VL - 41

SP - 857

EP - 874

JO - Journal of Mathematical Economics

JF - Journal of Mathematical Economics

IS - 7

ER -

Debt contracts and cooperative improvements

Abstract

Keywords

ASJC Scopus subject areas

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