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Debt contracts with ex-ante and ex-post asymmetric information: an example

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  • G. Carlier

    ()

  • L. Renou

    ()

Abstract

We consider a simple model of lending and borrowing combining two informational problems: adverse selection and costly state verification. Our analysis highlights the interaction between these two informational problems. We notably show that the higher the monitoring cost, the less discriminating the optimal menu of contracts is. Copyright Springer-Verlag Berlin/Heidelberg 2006

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File URL: http://hdl.handle.net/10.1007/s00199-005-0632-7
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 28 (2006)
Issue (Month): 2 (06)
Pages: 461-473

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Handle: RePEc:spr:joecth:v:28:y:2006:i:2:p:461-473

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Related research

Keywords: Debt contracts; Diversity of opinions; Screening; Costly monitoring; Pooling.;

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References

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  1. Boyd, J.h. & Smith, B.D., 1991. "The Equilibrium Allocation of Investment Capital in the Presence of Adverse Selection and Costly State Verification," RCER Working Papers 289, University of Rochester - Center for Economic Research (RCER).
  2. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  3. Guillaume Carlier & Ludovic Renou, 2005. "A costly state verification model with diversity of opinions," Economic Theory, Springer, vol. 25(2), pages 497-504, 02.
  4. Rochet, Jean-Charles, 1987. "A necessary and sufficient condition for rationalizability in a quasi-linear context," Journal of Mathematical Economics, Elsevier, vol. 16(2), pages 191-200, April.
  5. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
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Cited by:
  1. Sai Ding & Alessandra Guariglia & John Knight, . "Negative investment in China: financing constraints and restructuring versus growth," Discussion Papers 12/01, University of Nottingham, GEP.
  2. Hvide, Hans K & Leite, Tore, 2007. "Optimal Debt Contracts under Costly Enforcement," CEPR Discussion Papers 6040, C.E.P.R. Discussion Papers.
  3. Allen N. Berger & Marco A. Espinosa-Vega & W. Scott Frame & Nathan H. Miller, 2007. "Why do borrowers pledge collateral? new empirical evidence on the role of asymmetric information," Working Paper 2006-29, Federal Reserve Bank of Atlanta.
  4. Stefan Krasa & Tridib Sharma & Anne Villamil, 2008. "Bankruptcy and firm finance," Economic Theory, Springer, vol. 36(2), pages 239-266, August.
  5. Ludovic Renou, 2008. "Multi-lender coalitions in costly state verification models," Economic Theory, Springer, vol. 36(3), pages 407-433, September.

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