Incentive-Compatibility, Limited Liability and Costly Liquidation in financial Contracting
Abstract
This paper studies a financial contracting problem where a firm privately observes its cash flow and faces a limited liability constraint. The firm's collateral is piecemeal divisible and can only be liquidated continuously by resorting to the service of a costly third party, typically associated with bankruptcy. In this situation, multi-class collateralized debt is optimal, in which the firm makes several debt-like promises with a seniority structure. The decision over continuous and piecemeal liquidation depends on both the cost of introducing the third party and the firm's funding need. Allowing the firm to refinance ex-post through surreptitious liquidation may reduce the firm's ex-ante payoff, consistent with covenants in debt contracts prohibiting the sale of assets.
About the presenter’s visit
Dr Zhengqing Gui will be visiting the School of Economics on Tuesday 27 August 2019. While here he will be using room 520A Colin Clark Building. If you would like to meet with him or have lunch or dinner with him please contact A/Prof Heiko Gerlach who will be his host while at The University of Queensland. A/Prof Gerlach can be contacted on h.gerlach@uq.edu.au.
About Economic Theory Seminar Series
A seminar series designed specifically for economic theory researchers to network and collaborate.
