This paper by Oliver Hart and John Moore explores the dynamics of debt and default in a financial context. The authors analyze a situation where an entrepreneur borrows funds from a creditor to finance an investment project. The project generates future returns, which initially accrue to the entrepreneur but can be allocated to the creditor through a debt contract. The key feature of the model is that the creditor has the right to seize some fraction of the debtor's assets if the entrepreneur defaults. The paper examines how this right influences the form of the long-term debt contract and the efficiency of the debtor-creditor relationship. The authors find that, given that the liquidation value of the assets is typically less than their value to the debtor, the creditor often chooses not to exercise the right to seize the assets but instead renegotiates the loan. However, in some cases, the debtor's inability to commit credibly to pay a sufficient portion of the assets' future value to the creditor means that liquidation will occur anyway, even though it is inefficient. This explains the social costs of default or bankruptcy. The paper also discusses the optimal structure of the debt contract, including the trade-offs between reducing the debt level at different dates and the potential for renegotiation. It shows that an optimal contract typically involves a combination of an upfront transfer and a sequence of future debt liabilities. The authors conclude by characterizing the conditions under which a project will be financed and the implications for social efficiency.This paper by Oliver Hart and John Moore explores the dynamics of debt and default in a financial context. The authors analyze a situation where an entrepreneur borrows funds from a creditor to finance an investment project. The project generates future returns, which initially accrue to the entrepreneur but can be allocated to the creditor through a debt contract. The key feature of the model is that the creditor has the right to seize some fraction of the debtor's assets if the entrepreneur defaults. The paper examines how this right influences the form of the long-term debt contract and the efficiency of the debtor-creditor relationship. The authors find that, given that the liquidation value of the assets is typically less than their value to the debtor, the creditor often chooses not to exercise the right to seize the assets but instead renegotiates the loan. However, in some cases, the debtor's inability to commit credibly to pay a sufficient portion of the assets' future value to the creditor means that liquidation will occur anyway, even though it is inefficient. This explains the social costs of default or bankruptcy. The paper also discusses the optimal structure of the debt contract, including the trade-offs between reducing the debt level at different dates and the potential for renegotiation. It shows that an optimal contract typically involves a combination of an upfront transfer and a sequence of future debt liabilities. The authors conclude by characterizing the conditions under which a project will be financed and the implications for social efficiency.