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Strategic Default Jump as Impulse Control in Continuous Time

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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 veri able information. It shows that an optimal contract has the form of a long-term debt contract that permits a debtor's strategic default and debt restructuring. The default is characterized by a recurrent, optimal impulse control beyond default. Numerical examples show that the equilibrium probability of the default is decreasing in the monitoring technology level when the default causes a big wealth loss.

Suggested Citation

  • 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.
    • Handle: RePEc:tky:fseres:2007cf532
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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2007/2007cf532.pdf
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    as
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