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Incentive-Compatible Debt Contracts: The One-Period Problem
Abstract
In a simple model of borrowing and lending with asymmetric information we show that the optimal, incentive-compatible debt contract is the standard debt contract. The second-best level of investment never exceeds the first-best and is strictly less when there is a positive probability of costly bankruptcy. We also compare the second-best with the results of interest-rate-taking behaviour and consider the effects of risk aversion. Finally we provide conditions under which increasing the borrower's initial net wealth must reduce total investment in the venture.
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Cites
Credit Rationing in Markets with Imperfect Information
Stiglitz, J. E., & Weiss, A. (1981) · Columbia University · doi:10.7916/d8v12ft1 · Cited by 12,769
Financial intermediation and delegated monitoring
Diamond, D. W. (1984) · The Review of Economic Studies · doi:10.2307/2297430 · Cited by 8,476
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A Survey of Corporate Governance
Shleifer, A., & Vishny, R. W. (1997) · The Journal of Finance · doi:10.1111/j.1540-6261.1997.tb04820.x · Cited by 16,243
Firms, Contracts, and Financial Structure
Hart, O. (1995) · doi:10.1093/0198288816.001.0001 · Cited by 4,672
Financial intermediation and growth: Causality and causes
Levine, R., Loayza, N., & Beck, T. (2000) · Journal of Monetary Economics · doi:10.1016/s0304-3932(00)00017-9 · Cited by 4,414
Insiders and Outsiders: The Choice between Informed and Arm's‐Length Debt
RAJAN, R. G. (1992) · The Journal of Finance · doi:10.1111/j.1540-6261.1992.tb04662.x · Cited by 3,902
Chapter 12 Finance and Growth: Theory and Evidence
Levine, R. (2005) · Handbook of Economic Growth · doi:10.1016/s1574-0684(05)01012-9 · Cited by 2,889
The role of information and financial reporting in corporate governance and debt contracting
Armstrong, C. S., Guay, W. R., & Weber, J. P. (2010) · Journal of Accounting and Economics · doi:10.1016/j.jacceco.2010.10.001 · Cited by 1,494
The impact of monetary policy on bank balance sheets
Kashyap, A. K., & Stein, J. C. (1995) · Carnegie-Rochester Conference Series on Public Policy · doi:10.1016/0167-2231(95)00032-u · Cited by 1,130
Competition, risk neutrality and loan commitments
Boot, A., Thakor, A. V., & Udell, G. F. (1987) · Journal of Banking & Finance · doi:10.1016/0378-4266(87)90043-4 · Cited by 170
Metadata
- Authors
- Gale, D., & Hellwig, M.
- Venue
- The Review of Economic Studies
- Publisher
- Oxford University Press (OUP)
- Published
- 1985-10
- Volume
- 52
- Issue
- 4
- Pages
- 647
- ISSN
- 0034-6527 (ISSN-L)
- OpenAlex
- W2140281938
- Cited by
- 1,796
- References
- 2
- FWCI
- 35.66
- Type
- journal article
- Language
- en
- Open access
- closed
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Contains information from the Semantic Scholar Academic Graph Datasets, made available under the ODC Attribution License (ODC-BY 1.0).
Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
