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...

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....