The author examines the optimal pattern of lending in an environment in which there are two impediments to contracting. The first impediment is that lenders cannot observe whether borrowers invest or consume borrowed funds. This impediment leads to a moral hazard problem in investment. The second impediment is that the borrower may choose to repudiate his debts. The optimal contract is shown to specify that the borrowing country experience a capital outflow when the worst realizations of output occur. This seemingly perverse pattern of capital outflow forms a necessary part of the optimal solution to the moral hazard problem in investment. Copyright 1991 by The Econometric Society.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Article provided by Econometric Society in its journal Econometrica.
Volume (Year): 59 (1991) Issue (Month): 4 (July) Pages: 1069-89 Download reference. The following formats are available: HTML
(with abstract),
plain text
(with abstract),
BibTeX,
RIS (EndNote, RefMan, ProCite),
ReDIF
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.) This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.