Optimal Property Rights in Financial Contracting

Article in a refereed journal

Kenneth Ayotte and Patrick Bolton, "Optimal Property Rights in Financial Contracting", The Review of Financial Studies, vol. 24, n. 10, 2011, p. 3401-3433.


This article adopts a definition of property rights from legal scholarship: A property right (in contrast to a contractual right) is enforceable, not only against the parties to a contract, but also against third parties outside the contract. In a financial contracting setting, we ask: When should the law enforce a lender's contractual protections as property rights, given that these rights may be hidden and costly for other lenders to discover? Our model explains why the law limits the creation and enforceability of property rights, and develops principles of optimal enforceability. These principles are often reflected in the law.

JEL codes

K11: Property Law
K12: Contract Law
G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
G33: Bankruptcy; Liquidation

IAST Theme

Society, Globalization and Public Policy

IAST Discipline

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