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

Author

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  • Martin F. Hellwig

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

Abstract

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
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    Cited by:

    1. Balke, Nathan S. & Martinez-Garcia, Enrique & Zeng, Zheng, 2017. "Understanding the Aggregate Effects of Credit Frictions and Uncertainty," Globalization and Monetary Policy Institute Working Paper 317, Federal Reserve Bank of Dallas.
    2. 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

    Keywords

    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

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