Lender and Borrower as Principal and Agent

Karel Janda

No 2006/24, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: This paper provides a critical survey of some recent developments in the principal-agent approach to the relationship between lenders and borrowers. The costly state verification model of optimal debt contract is introduced and new results with respect to optimality of standard debt contracts in this model are discussed. Adverse selection in credit markets and its solution with a menu of screening contracts is described and the problems with collateral as a screening instrument are outlined. The dynamic relationship between the lender and borrower is introduced in a soft budget constraint model of default and bankruptcy decisions. Alternative assumptions about informational asymmetries in credit markets are presented as well. For all these topics a number of references from Czech and international economic literature is provided.

Keywords: principal; agent; contracts; credit; adverse selection; moral hazard (search for similar items in EconPapers)
JEL-codes: C72 D82 G21 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2006-07, Revised 2006-07
New Economics Papers: this item is included in nep-ban and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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