Optimal Dynamic Lending Contracts with Imperfect Enforceability

We develop a general dynamic model in which borrowing constraints arise endogenously as part of a constrained- efficient contract when borrowers face limited liability and debt repayment cannot be perfectly enforced. The model is qualitatively consistent with the some stylized facts on the growth and survival, and on the dividend and capital structure policies of firms. We derive new implications for the study of financing constraints and the behavior of small versus large firms