Basak, Suleyman; Shapiro, Alexander - In: The Journal of Business 78 (2005) 4, pp. 1215-1266
This article studies an economy with borrowers (firms or individuals) under costly default. Borrowers defaulting under adverse economic conditions may, despite incurring default costs, emerge as wealthier than nonborrowers. Asset substitution is generally not pronounced, although a larger risk...