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Journal article
Financial contracting with enforcement externalities
Journal of economic theory, v 178, pp 153-189
Nov 2018
Featured in Collection : UN Sustainable Development Goals @ Drexel
Abstract
We study the negative feedback loop between the aggregate default rate and the efficacy of enforcement in a model of debt-financed entrepreneurial activity. The novel feature of our model is that enforcement capacity is accumulated ex ante and thus subject to depletion ex post. We characterize the effect of shocks that deplete enforcement resources on the aggregate default rate and credit supply. In the model default decisions by entrepreneurs are strategic complements, leading to multiple equilibria. We propose a global game selection to overcome equilibrium indeterminacy and show how shocks that deplete enforcement capacity can lead to a spike in the aggregate default rate and trigger credit rationing.
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Details
- Title
- Financial contracting with enforcement externalities
- Creators
- Lukasz A. Drozd - Federal Reserve Bank of PhiladelphiaRicardo Serrano-Padial - Drexel University
- Publication Details
- Journal of economic theory, v 178, pp 153-189
- Publisher
- Elsevier
- Grant note
- Rodney L. White Center
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Economics (School of Economics)
- Web of Science ID
- WOS:000450385000007
- Scopus ID
- 2-s2.0-85053383218
- Other Identifier
- 991019167799204721
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- Collaboration types
- Domestic collaboration
- Web of Science research areas
- Economics