Incentive-compatibility, limited liability and costly liquidation in financial contracting

Gui, Zhengqing ; Thadden, Ernst-Ludwig von ; Zhao, Xiaojian

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Document Type: Working paper
Year of publication: 2018
The title of a journal, publication series: Discussion Paper Series - CRC TR 224
Volume: 064
Place of publication: Bonn
Publishing house: Collaborative Research Center Transregio 224
Publication language: English
Institution: School of Law and Economics > VWL, Mikroökonomische Theorie (von Thadden)
Subject: 330 Economics
Abstract: We characterize an optimal financial contract when the firm’s realized cashflow isunobservable to the investor and the firm’s collateral can only be liquidated partiallyby resorting to the services of a costly third party. An optimal contract may exhibita piecewise structure and vary with the liquidation cost and the firm’s actual liquidityshortage. Partial liquidation and wholesale transfers of collateral can coexist in anoptimal contract. In contrast to part of the literature, the incentive-compatibilityconstraint incorporates the firm’s limited liability, and may be slack at the optimum.Allowing the firm to overcome an ex-post liquidity shortage by borrowing surreptitiouslyfrom a third party may reduce the firm’s ex-ante expected utility.

Dieser Eintrag ist Teil der Universitätsbibliographie.

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