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Renegotiation‐proof Labour and Credit Contracts with Worker Mobility
Author(s) -
Tsoulouhas Theofanis
Publication year - 1999
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/1468-0335.00182
Subject(s) - creditor , credit rationing , investment (military) , value (mathematics) , business , state (computer science) , economics , labour economics , microeconomics , finance , interest rate , debt , law , algorithm , machine learning , politics , political science , computer science
This paper investigates the interaction between a privately informed firm’s contracts for labour and its contracts for credit. The analysis shows that if the worker has no ex post outside opportunities, or if the liquidation value of the firm is large, then the credit contract can always be state‐independent; if the worker has outside opportunities and the liquidation value is small, then the credit contract must be state‐dependent. However, if the worker is unable to precommit not to renegotiate with the firm, then the credit contract must be state‐independent to ensure renegotiation‐proofness and protect the interests of the creditor. This leads to credit rationing and under‐investment.