Debt contracts and cooperative improvements

Stefan Krasa, Tridib Sharma, Anne P. Villamil
2005 Journal of Mathematical Economics  
In this paper we consider a dynamic game with imperfect information between a borrower and lender who must write a contract to produce a consumption good. In order to analyze the game, we introduce the concept of a coalitional perfect Bayesian Nash equilibrium (cPBNE). We prove that equilibria exist and are efficient in a precise sense. Deterministic contracts that resemble debt are optimal for a general class of economies. The cPBNE solution concept captures both the non-cooperative aspect of
more » ... irm liquidation and the cooperative aspect of firm restructuring. JEL Classification Numbers: C70, D60, G30, K40
doi:10.1016/j.jmateco.2004.04.002 fatcat:i6ompc4r25cibcvkkm36vsrzly