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A Theory of Debt Based on the Inalienability of Human Capital

A Theory of Debt Based on the Inalienability of Human Capital Abstract Consider an entrepreneur who needs to raise funds from an investor, but cannot commit not to withdraw his human capital from the project. The possibility of a default or quit puts an upper bound on the total future indebtedness from the entrepreneur to the investor at any date. We characterize the optimal repayment path and show how it is affected both by the maturity structure of the project return stream and by the durability and specificity of project assets. Our results are consistent with the conventional wisdom about what determines the maturity structure of long-term debt contracts. * We would particularly like to thank Robert Vishny for valuable suggestions, and Lindsey Klecan for excellent research assistance. Rabindran Abraham, Helmut Bester, Douglas Diamond, Drew Fudenberg, Bengt Holmstrom, Charles Kahn, Shan Li, Andrei Shleifer, Ernst-Ludwig von Thadden, and two anonymous referees provided very useful comments on an earlier version. We are also grateful for financial support from the National Science Foundation, the Economic and Social Research Council of the United Kingdom, the Suntory-Toyota Centre for Economics and Related Disciplines at the London School of Economics, and the International Financial Services Research Center at the Massachusetts Institute of Technology. This content is only available as a PDF. © 1994 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Quarterly Journal of Economics Oxford University Press

A Theory of Debt Based on the Inalienability of Human Capital

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Publisher
Oxford University Press
Copyright
© 1994 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology
ISSN
0033-5533
eISSN
1531-4650
DOI
10.2307/2118350
Publisher site
See Article on Publisher Site

Abstract

Abstract Consider an entrepreneur who needs to raise funds from an investor, but cannot commit not to withdraw his human capital from the project. The possibility of a default or quit puts an upper bound on the total future indebtedness from the entrepreneur to the investor at any date. We characterize the optimal repayment path and show how it is affected both by the maturity structure of the project return stream and by the durability and specificity of project assets. Our results are consistent with the conventional wisdom about what determines the maturity structure of long-term debt contracts. * We would particularly like to thank Robert Vishny for valuable suggestions, and Lindsey Klecan for excellent research assistance. Rabindran Abraham, Helmut Bester, Douglas Diamond, Drew Fudenberg, Bengt Holmstrom, Charles Kahn, Shan Li, Andrei Shleifer, Ernst-Ludwig von Thadden, and two anonymous referees provided very useful comments on an earlier version. We are also grateful for financial support from the National Science Foundation, the Economic and Social Research Council of the United Kingdom, the Suntory-Toyota Centre for Economics and Related Disciplines at the London School of Economics, and the International Financial Services Research Center at the Massachusetts Institute of Technology. This content is only available as a PDF. © 1994 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

Journal

The Quarterly Journal of Economics – Oxford University Press

Published: Nov 1, 1994

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