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A Dynamic Theory of Debt Restructuring

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  • Hisashi Nakamura

    (Faculty of Economics, University of Tokyo)

Abstract

This paper studies a strategic role of debt restructuring under an optimal debt contract. It explores an infinite-horizon costly-monitoring model under Markov income shocks. It shows that, if (1) a borrower's project is expected to be profitable, (2) a lender's outside options are positively correlated with the borrower's project, and (3) disclosure costs are a medium level, then restructuring is preferred to termination of contract in default under an optimal contract. This optimal contract is implementable in a debt contract that permits debt restructuring. This paper also provides insights into autarkic financing features of the world's poorest economies.

Suggested Citation

  • Hisashi Nakamura, 2006. "A Dynamic Theory of Debt Restructuring," CARF F-Series CARF-F-072, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf072
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    Cited by:

    1. Hisashi Nakamura, 2007. "A Continuous-Time Analysis of Optimal Debt Contracts: Theory and Applications," 2007 Meeting Papers 230, Society for Economic Dynamics.
    2. Hisashi Nakamura, 2012. "A Continuous-Time Analysis of Optimal Restructuring of Contracts with Costly Information Disclosure," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 19(2), pages 119-147, May.
    3. Hisashi Nakamura, 2007. "Strategic Default Jump as Impulse Control in Continuous Time ( Revised in February 2008 )," CARF F-Series CARF-F-115, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    4. Hisashi Nakamura, 2007. "Strategic Default Jump as Impulse Control in Continuous Time," CIRJE F-Series CIRJE-F-532, CIRJE, Faculty of Economics, University of Tokyo.

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