The authors explain the use of legally unenforceable, discretionary financial contracts in circumstances where legally enforceable contracts are feasible. A discretionary contract allows a contracting party to choose whether or not to honor the contract. It is shown that such a contract...

Effective legal reserve requirements may hamper the private capital market's ability to price bank deposits. In the model developed here, the market has less information about bank assets than the banks have, and a bank can therefore signal its superior information through its choice of excess...

The authors examine equilibrium credit contracts and allocations under different competivity specifications, and explain the economic roles of collateral under these specifications. Both moral hazard and adverse selection are considered. The principal message is that how a competitive...