Paper #843

Title:

Aggregate consequences of limited contract enforceability

Authors:

Thomas Cooley, Ramon Marimon and Vicenzo Quadrini

Date:

June 1999 (Revised: October 2003)

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:

Innovation, enforcement, aggregate fluctuations, development, financing innovation

JEL codes:

E10, O11, O16, O40

Area of Research:

Macroeconomics and International Economics

Published in:

Journal of Political Economy, 2004, v.112(4), 817 - 847

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