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A tractable model of limited enforcement and the life-cycle dynamics of firms

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  • Ai, Hengjie
  • Li, Rui

Abstract

We develop a continuous-time model of optimal lending contracts under limited enforcement and provide closed-form solutions. We characterize the dynamics of firms’ growth rate, Tobin’s Q, and capital structure over their life cycles.

Suggested Citation

  • Ai, Hengjie & Li, Rui, 2018. "A tractable model of limited enforcement and the life-cycle dynamics of firms," Economics Letters, Elsevier, vol. 163(C), pages 136-140.
    • Handle: RePEc:eee:ecolet:v:163:y:2018:i:c:p:136-140
    DOI: 10.1016/j.econlet.2017.11.025
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    References listed on IDEAS

    as
    1. Rui Albuquerque & Hugo A. Hopenhayn, 2004. "Optimal Lending Contracts and Firm Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(2), pages 285-315.
    2. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    3. Yuliy Sannikov, 2008. "A Continuous-Time Version of the Principal-Agent Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(3), pages 957-984.
    4. Ai, Hengjie & Li, Rui, 2015. "Investment and CEO compensation under limited commitment," Journal of Financial Economics, Elsevier, vol. 116(3), pages 452-472.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Dynamic contract; Limited enforcement; Firm dynamics; Capital structure;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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