A costly state verification model with diversity of opinions

Guillaume Carlier () and Ludovic Renou

Economic Theory, 2005, vol. 25, issue 2, 497-504

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. Copyright Springer-Verlag Berlin/Heidelberg 2005

Keywords: Costly state verification; Heterogeneity of beliefs. (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1007/s00199-003-0429-5

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