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Dynamic Adverse Selection and Debt

Author

Listed:
  • Chemla, G.
  • Faure-Grimaud, A.

Abstract

This paper argues that the strategic use of debt favours the revelation of information in Dynamic adverse selection problems. Our argument is based on the idea that debt is a credible commitment to end long term relationships. Consequently, debt debt encourages a privately informed party to disclose its information at at early stages of a relationship. We illustrate our point with the finiancingndecisionof a monopolist selling a good to a buyer whose valuationis private information.

Suggested Citation

  • Chemla, G. & Faure-Grimaud, A., 1996. "Dynamic Adverse Selection and Debt," Papers 96.443, Toulouse - GREMAQ.
    • Handle: RePEc:fth:gremaq:96.443
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    References listed on IDEAS

    as
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    Cited by:

    1. Murat Usman, 2004. "Optimal Debt Contracts with Renegotiation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(4), pages 755-776, December.
    2. Omar Besbes & Dan A. Iancu & Nikolaos Trichakis, 2018. "Dynamic Pricing Under Debt: Spiraling Distortions and Efficiency Losses," Management Science, INFORMS, vol. 64(10), pages 4572-4589, October.
    3. Sofiane Aboura & Emmanuel Lépinette, 2015. "Do banks satisfy the Modigliani-Miller theorem?," Economics Bulletin, AccessEcon, vol. 35(2), pages 924-935.
    4. repec:dau:papers:123456789/13839 is not listed on IDEAS
    5. repec:dau:papers:123456789/6359 is not listed on IDEAS
    6. João Teixeira, 2014. "Outsourcing with debt financing," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 13(1), pages 1-24, April.
    7. Chemla, Gilles, 2004. "Takeovers and the dynamics of information flows," International Journal of Industrial Organization, Elsevier, vol. 22(4), pages 575-590, April.
    8. Arping, Stefan & Diaw, Khaled M., 2008. "Sunk costs, entry deterrence, and financial constraints," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 490-501, March.
    9. Usman, Murat, 2008. "Commitment with renegotiable debt contracts and verifiable cash flow," Economics Letters, Elsevier, vol. 99(2), pages 249-251, May.
    10. Arping, Stefan, 2005. "Protective interests and creative destruction," Journal of Financial Intermediation, Elsevier, vol. 14(4), pages 401-431, October.

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    More about this item

    Keywords

    INFORMATION;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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