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.