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Optimal Deterministic Debt Contracts

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Abstract

This paper extends the costly enforcement model of optimal financing to the case of investment projects financed by several lenders. We consider the asymmetric situation when only one lender is a big strategic investor. All other lender are small passive investors. We first provide the sufficient and necessary condition for renegotiation proofness. Then we show that the optima verification is deterministic. We also discuss the conditions under which the optimal contract is a debt contract.

Suggested Citation

  • Karel Janda, 2006. "Optimal Deterministic Debt Contracts," Working Papers IES 2006/25, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Oct 2006.
    • Handle: RePEc:fau:wpaper:wp2006_25
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    File URL: http://ies.fsv.cuni.cz/default/file/download/id/8853
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    References listed on IDEAS

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    1. Jeremy Berkowitz & Michelle J. White, 2004. "Bankruptcy and Small Firms' Access to Credit," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 69-84, Spring.
    2. Helmut Bester & Roland Strausz, "undated". "Imperfect Commitment and the Revelation Principle," Papers 004, Departmental Working Papers.
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    Cited by:

    1. Karel Janda, 2006. "Lender and Borrower as Principal and Agent," Working Papers IES 2006/24, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jul 2006.
    2. Karel Janda, 2006. "Agency Theory Approach to the Contracting between Lender and Borrower [Smluvní vztah mezi věřitelem a dlužníkem z hlediska přístupu teorie zastoupení]," Acta Oeconomica Pragensia, Prague University of Economics and Business, vol. 2006(3), pages 34-47.

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    More about this item

    Keywords

    Costly State Verification; Multiple Lenders; Debt;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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