Document Type

Working Paper

Publication Date

8-11-2016

SSRN Discipline

Economics Research Network; Legal Scholarship Network; Corporate Governance Network; Law & Society eJournals; Law & Society: Private Law eJournals; LSN Subject Matter eJournals; Financial Economics Network; Management Research Network

Abstract

The primary means of enforcement of legal liabilities is through the seizure of debtors' assets However debtors can shield their assets in various ways and thereby reduce the power of enforcement This paper studies the circumstances under which a debtor would choose to shield assets and the value of assets that would be shieldedA key idea is that borrower's wealth mutes shielding incentives Intuitively avoiding debts through shielding requires that enough assets will be shielded for else the debts can be collected from exposed assets A wealthier debtor would thus need to shield more assets and at a greater cost than a debtor with limited wealth Using this basic understanding I develop a theory of asset shielding and explore its implications for incomplete lending contracts explaining the role of equity agreements equity cushions and collateral and debt forgiveness and explore the some of the policy implications

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