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.
Biswas et al. (Wed,) studied this question.
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