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- Title
Risk aversion and incentive compatibility with ex post information asymmetry.
- Authors
Hellwig, Martin F.
- Abstract
Summary. 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.
- Subjects
CONTRACTS; BANKRUPTCY; DEBT; ENDOGENOUS growth (Economics); ECONOMICS
- Publication
Economic Theory, 2001, Vol 18, Issue 2, p415
- ISSN
0938-2259
- Publication type
Article
- DOI
10.1007/PL00004192