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A Theory of Debt Based on the Inalienability of Human Capital

Author

Listed:
  • Oliver Hart
  • John Moore
Abstract
Consider an entrepreneur whocneeds 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 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.

Suggested Citation

  • Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," STICERD - Theoretical Economics Paper Series 233, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    • Handle: RePEc:cep:stitep:233
    as

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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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