A Model of Dynamic Liquidity Contracts

41 Pages Posted: 26 Jan 2016 Last revised: 3 Feb 2016

See all articles by Onur Özgür

Onur Özgür

University of Melbourne - Melbourne Business School

Date Written: October 31, 2015

Abstract

I study long-term lending and borrowing in the absence of perfect enforceability and when lenders as well as borrowers are capital constrained. Borrowers receive random investment opportunities and need external financing. Lenders can commit to contractual agreements whereas borrowers can renege any period. Economy exhibits efficient investment cycles; absence of perfect enforcement and shortage of capital skew the cycles toward states of liquidity drought; credit is rationed if either the lender has too little capital or if the borrower has too little collateral. This paper's technical contribution is its demonstration of the existence and characterization of financial contracts that are solutions to a non-convex dynamic programming problem.

Keywords: credit rationing, credit cycles, default, dynamic programming, limited capital, liquidity, self-enforcing contracts

JEL Classification: C6, C7, D9, G2

Suggested Citation

Özgür, Onur, A Model of Dynamic Liquidity Contracts (October 31, 2015). Available at SSRN: https://ssrn.com/abstract=2721616 or http://dx.doi.org/10.2139/ssrn.2721616

Onur Özgür (Contact Author)

University of Melbourne - Melbourne Business School ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia

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