The Lender-Borrower Relationship with Risk Averse Lenders

Thilo Pausch

No 244, Discussion Paper Series from Universitaet Augsburg, Institute for Economics

Abstract: This paper analyzes optimal incentive compatible debt contracts when lenders are risk averse. The decisive factor in this regard is that risk aversion requiresto consider further sources of risk the lenders are exposed to. The main resultsderived in a setting of asymmetric information – the payment obligation ofthe optimal incentive compatible contract increases due to risk aversion oflenders which is reinforced by the introduction of a further source of risk – areshown to be in line with the results from the industrial organization approachof banking. Moreover, the results of the present paper are more general thanthe ones from the industrial organization approach.

Keywords: debt contracts; risk aversion; costly state verification; risk (search for similar items in EconPapers)
JEL-codes: D4 D8 G14 G33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn
Date: Written
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