Is there a paradox of pledgeability?

Dan Bernhardt, Kostas Koufopoulos, Giulio Trigilia

Research output: Contribution to journalArticlepeer-review


We show that in the limited-commitment framework of Donaldson et al. (2019), firm value always increases in the fraction of cash flows that can be pledged as collateral. That is, pledgeability increases investment efficiency and relaxes a firm's financing constraint. We derive this conclusion using the same contracts considered by the authors and generalize the result to an arbitrary number of states. We also show that the first best can always be implemented by a nonstate-contingent secured debt contract, which differs from the ones they consider.

Original languageEnglish (US)
Pages (from-to)606-611
Number of pages6
JournalJournal of Financial Economics
Issue number3
StatePublished - Sep 2020


  • Collateral
  • Pledgeability
  • Secured debt

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management


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