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Implications of Debt Renegotiation for Optimal Bank Policy and Firm Behavior
Joonmo Cho,Ashraf Nakibullah 서울대학교 경제연구소 1996 Seoul journal of economics Vol.9 No.1
This paper analyzes the problems associated with the renegotiation of debt contracts involving a bank (the lender) and a firm (the borrower) when the latter is operated by a risk averse manager. Firms undertake risky projects with loan capital borrowed from the bank. When a firm cannot pay off a loan it is technically bankrupt. Both the borrower and the lender may experience a Pareto-improvement in their positions by renegotiating the loan. By renegotiating the terms of the debt the financially distressed firm can avoid the stigmatization of bankruptcy and the bank can avoid the costs of seizing the borrower's assets. However, our main finding is that, from the bank's point of view, renegotiation as a policy of recovering loan payments may be inefficient in practice because of a) false bankruptcy claims and b) moral hazard problems associated with exposure or the firm to the risk of default. We present a solution to the false bankruptcy claim problem that involves a mixed strategy between asset seizure by the bank and debt renegotiation. We also discuss the of collateral under the mixed strategy.
A Sorting cum Learning Model with a Moral Hazard Problem
Joonmo Cho,Ashraf Nakibullah 서울대학교 경제연구소 1991 Seoul journal of economics Vol.4 No.4
This paper investigates the existence of competitive equilibrium of an information game under the following circumstances: 1) A continuum of test qualities exists where each firm is able to choose one test. Firms offer contracts which are wage/test quality pairs, and they treat contracts of other firms as given. 2) The tests have two kinds of roles. First, as a productivity enhancing device, the tests enhance workers' productivity. Second, as a sorting device, the tests divide workers into those who pass and those who fail. However, tests have a moral hazard problem as a sorting device because workers may choose hidden actions to enhance their test scores. Under the above circumstances, distinctive features of the condition for the nonexistence of the competitive equilibrium are noticed: If a primary purpose of testing workers is to enhance workers' productivity, then the competitive equilibrium of the information game exists. However, if a primary purpose of testing workers is to sort out workers and the tests have a moral hazard problem, the competitive equilibrium does not exist.