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- Title
A costly state verification model with diversity of opinions.
- Authors
Carlier, Guillaume; Renou, Ludovic
- Abstract
In simple models of borrowing and lending with ex-post asymmetric information, Gale and Hellwig (1985) and Williamson (1986) have shown that optimal debt contracts are simple debt contracts where borrowers repay a fixed interest rate whenever possible and lenders seize all the profit when borrowers default. In this note, we depart from their works by assuming that borrowers and lenders have heterogeneous beliefs, and show that simple debt contracts do not necessarily survive as optimal contracts.
- Subjects
DEBT; LOANS; DEBT management; FINANCIAL management; FIXED interest rates; DEFAULT (Finance)
- Publication
Economic Theory, 2005, Vol 25, Issue 2, p497
- ISSN
0938-2259
- Publication type
Article
- DOI
10.1007/s00199-003-0429-5