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Debt Contracts with ex-ante and ex-post Asymmetric Information: An Example

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Author Info

  • Guillaume Carlier

    (Universite Paris IX-Dauphine)

  • Ludovic Renou

    (School of Economics, University of Adelaide)

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.

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File URL: http://www.economics.adelaide.edu.au/research/papers/doc/wp2005-03.pdf
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Bibliographic Info

Paper provided by University of Adelaide, School of Economics in its series School of Economics Working Papers with number 2005-03.

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Length: 13 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:adl:wpaper:2005-03

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Postal: Adelaide SA 5005
Phone: (618) 8303 5540
Web page: http://www.economics.adelaide.edu.au/
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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. 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.
  2. 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).
  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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Citations

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Cited by:
  1. John Knight & Sai Ding and Alessandra Guariglia, 2010. "Negative investment in China: financing constraints and restructuring versus growth," Economics Series Working Papers 519, University of Oxford, Department of Economics.
  2. 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.
  3. Ludovic Renou, 2008. "Multi-lender coalitions in costly state verification models," Economic Theory, Springer, vol. 36(3), pages 407-433, September.
  4. Hans Hvide & Tore Leite, 2010. "Optimal debt contracts under costly enforcement," Economic Theory, Springer, vol. 44(1), pages 149-165, July.
  5. Stefan Krasa & Tridib Sharma & Anne Villamil, 2008. "Bankruptcy and firm finance," Economic Theory, Springer, vol. 36(2), pages 239-266, August.

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