Summary
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.
I am grateful for helpful comments from Paul Povel and an anonymous referee. I am also grateful for research support from the Deutsche Forschungsgemeinschaft.
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© 2005 Springer-Verlag Berlin Heidelberg
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Hellwig, M.F. (2005). Risk aversion and incentive compatibility with ex post information asymmetry. In: Glycopantis, D., Yannelis, N.C. (eds) Differential Information Economies. Studies in Economic Theory, vol 19. Springer, Berlin, Heidelberg. https://doi.org/10.1007/3-540-26979-7_18
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DOI: https://doi.org/10.1007/3-540-26979-7_18
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Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-540-21424-3
Online ISBN: 978-3-540-26979-3
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