Debt contracts and cooperative improvements

Stefan Krasa, Tridib Sharma, Anne P. Villamil

Research output: Contribution to journalArticle

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 languageEnglish (US)
Pages (from-to)857-874
Number of pages18
JournalJournal of Mathematical Economics
Volume41
Issue number7
DOIs
StatePublished - Nov 1 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

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