Aggregate Consequences of Limited Contract Enforceability
Working Paper 10132
DOI 10.3386/w10132
Issue Date
We study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts. Because of enforceability problems, contracts are constrained efficient. We show that limited enforceability amplifies the impact of technological innovations on aggregate output. More generally, we show that lower enforceability of contracts will be associated with greater aggregate volatility. A key assumption for this result is that defaulting entrepreneurs are not excluded from the market.
Published Versions
Cooley, Thomas, Ramon Marimon and Vincenzo Quadrini. "Aggregate Consequences Of Limited Contract Enforceability," Journal of Political Economy, 2004, v112(4,Aug), 817-847. citation courtesy of