A theory of debt maturity and innovation

Yuliyan Mitkov

doi:10.1016/j.jet.2024.105828

A theory of debt maturity and innovation

Yuliyan Mitkov

University of Bonn

Research output: Contribution to journal › Article › peer-review

Abstract (may include machine translation)

The financing of innovative firms must balance two competing goals. First, the entrepreneur must be adequately protected from failure to encourage innovation. However, if the attempt to innovate fails, the entrepreneur's firm should be liquidated and its assets redeployed elsewhere. Meeting these two goals is inherently challenging when contracts are incomplete and shaped by ex-post renegotiation. I investigate how firms can choose the maturity of their debt to motivate innovation. The theory highlights a novel interaction between low-powered incentives, renegotiation, and debt maturity.

Original language	English
Article number	105828
Number of pages	18
Journal	Journal of Economic Theory
Volume	218
DOIs	https://doi.org/10.1016/j.jet.2024.105828
State	Published - Jun 2024
Externally published	Yes

Keywords

Debt
Incomplete contracts
Innovation
Renegotiation

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Mitkov-Yuliyan_2024-06Publisher version, 1.03 MBLicense: CC BY

Cite this

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AB - The financing of innovative firms must balance two competing goals. First, the entrepreneur must be adequately protected from failure to encourage innovation. However, if the attempt to innovate fails, the entrepreneur's firm should be liquidated and its assets redeployed elsewhere. Meeting these two goals is inherently challenging when contracts are incomplete and shaped by ex-post renegotiation. I investigate how firms can choose the maturity of their debt to motivate innovation. The theory highlights a novel interaction between low-powered incentives, renegotiation, and debt maturity.

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KW - Incomplete contracts

KW - Innovation

KW - Renegotiation

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A theory of debt maturity and innovation

Abstract (may include machine translation)

Keywords

Access to Document

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