Optimal Lending Contracts with Long Run Borrowing Constraints

Journal of Economic Dynamics and Control, 37(5) 2013, pp. 964-983

20 Pages Posted: 8 Jan 2014

Date Written: March 2, 2012

Abstract

This paper discusses two variations to the optimal lending contract under asymmetric information studied in Clementi and Hopenhayn (2006). One variation assumes that the entrepreneur is less patient than the bank, and the other assumes the bank has limited commitment.The qualitative properties of the two modified contracts are very similar. In particular, both variations lead to borrowing constraints that are always binding such that the firm is financially constrained throughout its life cycle and subject to a positive probability of being liquidated eventually.

Keywords: Optimal lending contract, Borrowing constraints, Asymmetric information, Limited commitment, Impatient entrepreneur

JEL Classification: G3, L2, D21

Suggested Citation

Li, Shuyun May, Optimal Lending Contracts with Long Run Borrowing Constraints (March 2, 2012). Journal of Economic Dynamics and Control, 37(5) 2013, pp. 964-983, Available at SSRN: https://ssrn.com/abstract=2376019

Shuyun May Li (Contact Author)

University of Melbourne ( email )

Melbourne, 3010
Australia

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