A costly state verification model with diversity of opinions

Guillaume Carlier; Ludovic Renou

doi:https://doi.org/10.1007/s00199-003-0429-5

A costly state verification model with diversity of opinions

Guillaume Carlier, Ludovic Renou

Research output: Contribution to journal › Article › Research › peer-review

12 Citations (Scopus)

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. © Springer-Verlag 2005.

Original language	English
Pages (from-to)	497-504
Journal	Economic Theory
Volume	25
DOIs	https://doi.org/10.1007/s00199-003-0429-5
Publication status	Published - 1 Feb 2005

Keywords

Costly state verification
Heterogeneity of beliefs

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AB - 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. © Springer-Verlag 2005.

KW - Costly state verification

KW - Heterogeneity of beliefs

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