symposium articles: Risk aversion and incentive compatibility with ex post information asymmetry

Martin Hellwig

Economic Theory, 2001, vol. 18, issue 2, 415-438

Abstract: The paper extends Diamond's (1984) analysis of financial contracting with information asymmetry ex post and endogenous "bankruptcy penalties" to allow for risk aversion of the borrower. The optimality of debt contracts, which Diamond obtained for the case of risk neutrality, is shown to be nonrobust to the introduction of risk aversion. This contrasts with the costly state verification literature, in which debt contracts are optimal for risk averse as well as risk neutral borrowers.

Keywords: Debt contracts; Risk sharing under asymmetric information. (search for similar items in EconPapers)
JEL-codes: D82 G32 (search for similar items in EconPapers)
Date: 2001-05-08
Note: Received: December 7, 1998; revised version: June 9, 1999
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Citations: View citations in EconPapers (6)

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