Working Paper: NBER ID: w10132
Authors: Thomas Cooley; Ramon Marimon; Vincenzo Quadrini
Abstract: 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.
Keywords: contract enforceability; financial constraints; aggregate volatility; technological innovations
JEL Codes: E3; G0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Limited contract enforceability (K12) | Amplified impact of technological innovations on aggregate output (O49) |
| Lower enforceability of contracts (K12) | Greater aggregate volatility (E19) |
| Technological innovations (O39) | Increased capital allocation to constrained firms (G31) |
| Limited contract enforceability (K12) | Greater willingness to repudiate contracts (G33) |