Optimal contracts under imperfect enforcement revisited
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- Discussion papers (FOR) 
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 path, consistent with empirical evidence on repayment and monitoring behavior in credit markets.
UtgiverNorwegian School of Economics and Business Administration. Department of Finance and Management Science