Incentive-Compatible Debt Contracts: The One-Period Problem
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ID: 291142
1985
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Abstract
In a simple model of borrowing and lending with asymmetric information we show that the optimal, incentive-compatible debt contract is the standard debt contract. The second-best level of investment never exceeds the first-best and is strictly less when there is a positive probability of costly bankruptcy. We also compare the second-best with the results of interest-rate-taking behaviour and consider the effects of risk aversion. Finally we provide conditions under which increasing the borrower's initial net wealth must reduce total investment in the venture.
| Reference Key |
openalex_W2140281938
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|---|---|
| Authors | Douglas Gale, Martin Hellwig |
| Journal | The Review of Economic Studies |
| Year | 1985 |
| DOI |
10.2307/2297737
|
| URL | |
| Keywords | Keywords not found |
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