We consider default by firms that are part of a single clearing mechanism. The obligations of all firms within the system are determined simultaneously in a fashion consistent with the priority of debt claims and the limited liability of equity. We first show, via a fixed-point argument, that...

We model the effect of external financing on a firm's ability to maintain a reputation for high-quality production. Producing high quality is first best. Defecting to low quality is tempting because it lowers current costs while revenue remains unchanged because consumers and outside investors...