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

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Author Info

  • G. Carlier

    (Universite Paris IX-Dauphine, CEREMADE, Place du Marechal De Lattre De Tassigny,)

  • L. Renou

    (University of Adelaide, School of Economics)

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://128.118.178.162/eps/game/papers/0502/0502003.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Game Theory and Information with number 0502003.

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Date of creation: 03 Feb 2005
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Handle: RePEc:wpa:wuwpga:0502003

Note: Type of Document - pdf. See Ludovic Renou webpage for a technical appendix.
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Web page: http://128.118.178.162

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Keywords: debt contracts; diversity of opinions; screening; costly monitoring; pooling.;

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References

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  1. Boyd, John H & Smith, Bruce D, 1993. "The Equilibrium Allocation of Investment Capital in the Presence of Adverse Selection and Costly State Verification," Economic Theory, Springer, vol. 3(3), pages 427-51, July.
  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. 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.
  5. 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.
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Cited by:
  1. Hans Hvide & Tore Leite, 2010. "Optimal debt contracts under costly enforcement," Economic Theory, Springer, vol. 44(1), pages 149-165, July.
  2. Ludovic Renou, 2008. "Multi-lender coalitions in costly state verification models," Economic Theory, Springer, vol. 36(3), pages 407-433, September.
  3. Sai Ding & Alessandra Guariglia & John Knight, . "Negative investment in China: financing constraints and restructuring versus growth," Discussion Papers 12/01, University of Nottingham, GEP.
  4. Stefan Krasa & Tridib Sharma & Anne Villamil, 2008. "Bankruptcy and firm finance," Economic Theory, Springer, vol. 36(2), pages 239-266, August.
  5. Marie-Louise Vier�, 2012. "Contracting in Vague Environments," American Economic Journal: Microeconomics, American Economic Association, vol. 4(2), pages 104-30, May.
  6. 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.

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