Liu, Zheng; Wang, Pengfei - Federal Reserve Bank of San Francisco - 2010
constrained by expected equity value. Interactions between debt and equity value made possible by credit constraints generate a …We present a model with heterogeneous firms, in which credit constraints may give rise to self-fulfilling, sunspot …-driven business cycle fluctuations. We derive optimal incentive-compatible loan contracts, under which a firm’s borrowing capacity is …