A costly state verification model with diversity of opinions

Guillaume Carlier, Ludovic Renou

    Research output: Contribution to journalArticleResearchpeer-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 languageEnglish
    Pages (from-to)497-504
    JournalEconomic Theory
    Volume25
    DOIs
    Publication statusPublished - 1 Feb 2005

    Keywords

    • Costly state verification
    • Heterogeneity of beliefs

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