| Thomas Cooley, University of Rochester Ramon Marimon, European University Institute, Ministry of Science and Technology, Universitat Pompeu Fabra, CEPR and NBER Vincenzo Quadrini, Duke University and CEPR |
| Limited Enforeceability, Heterogeneity and the Macroeconomy |
| Session: C-1-20 Friday 11 August 2000 by Marimon, Ramon |
| In this paper we develop a general equilibrium model in which firms finance investment by signing long-term contracts with a financial intermediary. Due to enforceability problems, financial contracts are constrained optimal, that is, they maximize the surplus of the contract subject to incentive compatibility constraints. By comparing this model with an alternative model in which contracts are fully enforceable, we evaluate the quantitative importance of non-enforceability for the aggregate allocation of the economy. We find that in the steady state the welfare level in the economy with enforceable contracts is 2.6 percent larger than in the economy with non-enforceable contracts. |
| Submitted paper full-text in .pdf |