Optimal lending contracts

Christian At and Lionel Thomas

Oxford Economic Papers, 2017, vol. 69, issue 1, 263-277

Abstract: This paper deals with financial contracting between a lender and a borrower with a project to finance. The borrower is protected by limited liability. We consider that the revenue from the project is observable and verifiable but its distribution is influenced by both the borrower’s choice of action and the project’s quality, which are private information. We find that debt contracts are endogenously optimal, as under moral hazard alone. Moreover, while moral hazard leads to credit rationing for the lowest-quality projects only, adding adverse selection creates a bang-bang result: either all projects or none are credit rationed.

JEL-codes: D82 G30 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (4)

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Working Paper: Optimal lending contracts (2016)
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