A theory of liquidity and risk management based on the inalienability of risky human capital

Author / Creator

Bolton, Patrick, 1957- author

Available as

Online

Summary

We formulate a dynamic financial contracting problem with risky inalienable human capital. We show that the inalienability of the entrepreneur's risky human capital not only gives rise to endogenou...

We formulate a dynamic financial contracting problem with risky inalienable human capital. We show that the inalienability of the entrepreneur's risky human capital not only gives rise to endogenous liquidity limits but also calls for dynamic liquidity and risk management policies via standard securities that firms routinely pursue in practice, such as retained earnings, possible line of credit draw-downs, and hedging via futures and insurance contracts.

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