This paper studies optimal bankruptcy laws in a framework with asymmetric information. The key idea is that the financial distress of a firm is not observed by its lenders for quite a while. As early rescues are much cheaper than late rescues, it may pay if the creditors are forgiving in...

This paper analyses the effects of liquidity constraints on a firm's output decisions by emphasizing the role of production costs. We present a simple duopoly model in which firms have to produce goods and incur production costs before they can offer their products in the market. A financially...

We study a firm's incentives in an environment in which optimal contracts resemble debt. After agreeing to the terms of a financial contract, but before its earnings are realised, a firm has to take a decision which affects its cash flows. This decision cannot be observed by the lender; this is...