Abstract
This paper analyzes choice-theoretic costly enforcement in an intertemporal contracting model with a differentially informed investor and entrepreneur. An intertemporal contract is modeled as a mechanism in which there is limited commitment to payment and enforcement decisions. The goal of the analysis is to characterize the effect of choice-theoretic costly enforcement on the structure of optimal contracts. The paper shows that simple debt is the optimal contract when commitment is limited and costly enforcement is a decision variable (Theorem 1). In contrast, stochastic contracts are optimal when agents can commit to the ex-ante optimal decisions (Theorem 2). The paper also shows that the costly state verification model can be viewed as a reduced form of an enforcement model in which agents choose payments and strategies as part of a perfect Bayesian Nash equilibrium.
Original language | English (US) |
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Pages (from-to) | 119-134 |
Number of pages | 16 |
Journal | Econometrica |
Volume | 68 |
Issue number | 1 |
DOIs | |
State | Published - 2000 |
Keywords
- Contracts
- Costly state verification
- Debt
- Enforcement
- Limited commitment
- Renegotiation
- Stochastic monitoring
- Time consistency
ASJC Scopus subject areas
- Economics and Econometrics