Revisiting "A theory of debt maturity and innovation" [J. Econ. Theory 218 (2024) 105828]

Biswas, S. ORCID: https://orcid.org/0000-0003-3124-5070, Koufopoulos, K. and Nguyen, T. M. (2026) Revisiting "A theory of debt maturity and innovation" [J. Econ. Theory 218 (2024) 105828]. Journal of Economic Theory, 234. 106167. ISSN 1095-7235 doi: 10.1016/j.jet.2026.106167

Abstract/Summary

We reconsider the incomplete contracting framework of Mitkov (2024) in which an entrepreneur seeks funding for a project and can privately choose its type. Renegotiation is permitted at an intermediate date. We characterize the conditions under which pay-for-failure is necessary to incentivize the entrepreneur to undertake the value-maximizing innovative project. When pay-for-failure is necessary, we generalize Mitkov (2024)’s results by showing that callable long-term debt can replicate the state-contingent contract for a strictly positive measure of parameters, and hence, we provide a rationale for its use in this setting.

Item Type	Article
URI	https://centaur.reading.ac.uk/id/eprint/129554
Identification Number/DOI	10.1016/j.jet.2026.106167
Refereed	Yes
Divisions	Henley Business School > Finance and Accounting
Publisher	Elsevier
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