Exclusive Contracts and the Institution of Bankruptcy

Abstract

This paper studies the institution of when exclusive contracts cannot be enforced ex ante, e.g., a bank cannot monitor whether the borrower enters into contracts with other creditors. The institution of enables the bank to enforce its claim to any funds that the borrower has above a fixed bankruptcy protection level. Bankruptcy mproves on non-exclusive contractual relationships but is not a perfect substitute for exclusivity ex ante. We characterize the effect of provisions on the equilibrium contracts which borrowers use to raise financing.