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Strategic Default Jump as Impulse Control in Continuous Time ( Revised in February 2008 )

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  • Hisashi Nakamura

    (Faculty of Economics, University of Tokyo)

Abstract

This paper presents a new approach for modeling an optimal debt contract in continuous time. It examines a competing contract design in a continuous-time environment with Markov income shocks and costly verifiable information. It shows that an optimal contract has the form of a debt contract that permits a debtor's strategic default and reorganization. The default is formulated as an optimal impulse control. This paper provides a useful framework to investigate the debtor's default incentives in relationships to a monitoring technology. Numerical examples show that the equilibrium probability of the default is decreasing in a level of the monitoring technology.

Suggested Citation

  • 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.
    • Handle: RePEc:cfi:fseres:cf115
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    File URL: https://www.carf.e.u-tokyo.ac.jp/old/pdf/workingpaper/fseries/117.pdf
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