Hvide, Hans K. - Institutt for foretaksøkonomi, Norges Handelshøyskole … - 2005
We consider a financing game with costly enforcement based on Townsend (1979), but where monitoring is non-contractible and allowed to be stochastic. Debt is the optimal contract. Moreover, the debt contract induces creditor leniency and strategic defaults by the borrower on the equilibrium...