CIRJE-F-433 | "A Dynamic Theory of Debt Restructuring" |
Author Name | Nakamura, Hisashi |
Date | August 2006 |
Full Paper | @ |
Remarks | @ |
Abstract |
This paper studies a strategic role of debt restructuring under an optimal debt contract. It explores an infinite-horizon costly-monitoring model under Markov income shocks. It shows that, if (1) a borrower's project is expected to be profitable, (2) a lender's outside options are positively correlated with the borrower's project, and (3) disclosure costs are a medium level, then restructuring is preferred to termination of contract in default under an optimal contract. This optimal contract is implementable in a debt contract that permits debt restructuring. This paper also provides insights into autarkic financing features of the world's poorest economies.
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