Journal article
Bankruptcy and firm finance
Economic theory, Vol.36(2), pp.239-266
08/2008
DOI: 10.1007/s00199-007-0267-y
Abstract
This paper analyzes how an enforcement mechanism that resembles a court affects firm finance. The court is described by two parameters that correspond to enforcement costs and the amount of creditor/debtor protection. We provide a theoretical and quantitative characterization of the effect of these enforcement parameters on the contract loan rate, the default probability and welfare. We analyze agents’ incentive to default and pursue bankruptcy and show that when the constraints that govern these decisions bind, the enforcement parameters can have a sharply non-linear effect on finance. We also compute the welfare losses of “poor institutions” and show that they are non-trivial. The results provide guidance on when models which abstract from enforcement provide good approximations and when they do not.
Details
- Title: Subtitle
- Bankruptcy and firm finance
- Creators
- Stefan Krasa - Department of Economics University of Illinois 1206 S. 6th Street Champaign IL 61820 USATridib Sharma - Centro de Investigación Económica, ITAM Ave. Camino Santa Teresa #930 Mexico D.F 10700 MexicoAnne Villamil - Department of Economics University of Illinois 1206 S. 6th Street Champaign IL 61820 USA
- Resource Type
- Journal article
- Publication Details
- Economic theory, Vol.36(2), pp.239-266
- Publisher
- Springer-Verlag
- DOI
- 10.1007/s00199-007-0267-y
- ISSN
- 0938-2259
- eISSN
- 1432-0479
- Language
- English
- Date published
- 08/2008
- Academic Unit
- Economics
- Record Identifier
- 9984083292202771
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