Aggregate consequences of limited contract enforceability
(joint with Thomas Cooley and Ramon Marimon)

We study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts. Because of enforceability problems, contracts are constrained efficient. We show that limited enforceability amplifies the impact of technological innovations on aggregate output. More in general, lower is the degree of contract enforceability and larger is the macroeconomic instability. A key assumption to generate this result is that defaulting entrepreneurs are not excluded from the market.