IDEAS home Printed from
   My bibliography  Save this article

symposium articles: Risk aversion and incentive compatibility with ex post information asymmetry


  • Martin F. Hellwig

    () (Fakultät für Volkswirtschaftslehre, Universität Mannheim, Seminargebäude A5, 68131 Mannheim, GERMANY)


The paper extends Diamond's (1984) analysis of financial contracting with information asymmetry ex post and endogenous "bankruptcy penalties" to allow for risk aversion of the borrower. The optimality of debt contracts, which Diamond obtained for the case of risk neutrality, is shown to be nonrobust to the introduction of risk aversion. This contrasts with the costly state verification literature, in which debt contracts are optimal for risk averse as well as risk neutral borrowers.

Suggested Citation

  • Martin F. Hellwig, 2001. "symposium articles: Risk aversion and incentive compatibility with ex post information asymmetry," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 18(2), pages 415-438.
  • Handle: RePEc:spr:joecth:v:18:y:2001:i:2:p:415-438 Note: Received: December 7, 1998; revised version: June 9, 1999

    Download full text from publisher

    File URL:
    Download Restriction: Access to the full text of the articles in this series is restricted

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Holmstrom, Bengt & Myerson, Roger B, 1983. "Efficient and Durable Decision Rules with Incomplete Information," Econometrica, Econometric Society, vol. 51(6), pages 1799-1819, November.
    3. Bulow, Jeremy & Roberts, John, 1989. "The Simple Economics of Optimal Auctions," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1060-1090, October.
    4. Ronald M. Harstad, 2005. "Rational Participation Revolutionizes Auction Theory," Working Papers 0518, Department of Economics, University of Missouri.
    5. Bulow, Jeremy I. & Klemperer, Paul, 1994. "Auctions vs. Negotiations," CEPR Discussion Papers 924, C.E.P.R. Discussion Papers.
    6. Riley, John G & Samuelson, William F, 1981. "Optimal Auctions," American Economic Review, American Economic Association, vol. 71(3), pages 381-392, June.
    7. Matthews, Steven A., 1983. "Selling to risk averse buyers with unobservable tastes," Journal of Economic Theory, Elsevier, vol. 30(2), pages 370-400, August.
    8. McAfee, R Preston & McMillan, John & Reny, Philip J, 1989. "Extracting the Surplus in the Common-Value Auction," Econometrica, Econometric Society, vol. 57(6), pages 1451-1459, November.
    9. Robert Wilson, 1977. "A Bidding Model of Perfect Competition," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 511-518.
    10. Harstad, Ronald M., 1991. "Asymmetric bidding in second-price, common-value auctions," Economics Letters, Elsevier, vol. 35(3), pages 249-252, March.
    11. Nicola Persico, 2000. "Information Acquisition in Auctions," Econometrica, Econometric Society, vol. 68(1), pages 135-148, January.
    12. Harris, Milton & Raviv, Artur, 1981. "Allocation Mechanisms and the Design of Auctions," Econometrica, Econometric Society, vol. 49(6), pages 1477-1499, November.
    13. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
    14. Robert, Jacques, 1991. "Continuity in auction design," Journal of Economic Theory, Elsevier, vol. 55(1), pages 169-179, October.
    15. Colin Campbell & Dan Levin, 2006. "When and why not to auction," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 27(3), pages 583-596, April.
    16. Cremer, Jacques & McLean, Richard P, 1985. "Optimal Selling Strategies under Uncertainty for a Discriminating Monopolist When Demands Are Interdependent," Econometrica, Econometric Society, vol. 53(2), pages 345-361, March.
    17. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-1257, November.
    18. McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Morrison, Alan D. & White, Lucy, 2011. "Deposit insurance and subsidized recapitalizations," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3400-3416.

    More about this item


    Debt contracts; Risk sharing under asymmetric information.;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:joecth:v:18:y:2001:i:2:p:415-438. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.