We study the macroeconomic implications of the debt overhang distortion. In our model, the distortion arises because … investment is non-contractible—when a firm borrows funds, the debt contract cannot specify or depend on the firm’s future level … of investment. After the debt contract is signed, the probability that the firm will default on its debt obligation acts …

An examination of whether the costly random verification scheme affects the optimal debt contract for small business …. It finds, contrary to Townsend (1979) and Williamson (1986, 1987), that the standard debt contract is the optimal debt …