A tractable model of limited enforcement and the life-cycle dynamics of firms

We develop a continuous-time model of optimal lending contracts under limited enforcement and provide closed-form solutions. We characterize the dynamics of firms’ growth rate, Tobin’s Q, and capital structure over their life cycles. •Closed-form solution for optimal contracting with limited commitm...

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Bibliographic Details
Published in:Economics letters 2018-02, Vol.163, p.136-140
Main Authors: Ai, Hengjie, Li, Rui
Format: Article
Language:English
Subjects:
Capital structure
Dynamic contract
Economic models
Enforcement
Firm dynamics
Growth rate
Life cycles
Limited enforcement
Studies
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Summary:We develop a continuous-time model of optimal lending contracts under limited enforcement and provide closed-form solutions. We characterize the dynamics of firms’ growth rate, Tobin’s Q, and capital structure over their life cycles. •Closed-form solution for optimal contracting with limited commitment.•Characterization of firms’ life cycle as two stages: the financially constrained stage and the mature stage.•Closed-form solutions for the investment, Tobin’s Q and leverage in the two stages of a firm’s life cycle.
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2017.11.025