The Lender-Borrower Relationship with Risk Averse Lenders
AbstractThis paper analyzes optimal incentive compatible debt contracts when lenders are risk averse. The decisive factor in this regard is that risk aversion requiresto consider further sources of risk the lenders are exposed to. The main resultsderived in a setting of asymmetric information – the payment obligation ofthe optimal incentive compatible contract increases due to risk aversion oflenders which is reinforced by the introduction of a further source of risk – areshown to be in line with the results from the industrial organization approachof banking. Moreover, the results of the present paper are more general thanthe ones from the industrial organization approach.
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Bibliographic InfoPaper provided by Universitaet Augsburg, Institute for Economics in its series Discussion Paper Series with number 244.
Date of creation: Jul 2003
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debt contracts; risk aversion; costly state verification; risk;
Find related papers by JEL classification:
- D4 - Microeconomics - - Market Structure and Pricing
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-CFN-2003-07-13 (Corporate Finance)
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