A THEORY OF DEBT BASED ON THE INALIENABILITY OF HUMAN-CAPITAL

Consider an entrepreneur who needs to raise funds from an investor, bu t cannot commit not to withdraw his human capital from the project. Th e possibility of a default or quit puts an upper bound on the total fu ture indebtedness from the entrepreneur to the investor at any date. W e characterize the optimal repayment path and show how it is affected both by the maturity structure of the project return stream and by the durability and specificity of project assets. Our results are consist ent with the conventional wisdom about what determines the maturity st ructure of long-term debt contracts.