Optimal Lending Contracts and Firm Dynamics

University Of Rochester, Rochester NY

Investigators

Abstract

This project studies borrowing constraints and their implications for firm growth and survival. Recent empirical work suggests that financial constraints are an important determinant of the evolution of small and young firms. As repayment of loans cannot be always guaranteed, long-term contracts can often provide better incentives to borrowers. Applying recent advances in contract theory, this project considers the optimal design of such long-term lending contracts. Implications for firm dynamics --growth and survival-- of small and young firms are considered.