Risk aversion and incentive compatibility with ex post information asymmetry

Hellwig, Martin

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URL: https://ub-madoc.bib.uni-mannheim.de/2883
URN: urn:nbn:de:bsz:180-madoc-28838
Document Type: Working paper
Year of publication: 1998
The title of a journal, publication series: Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung
Volume: 98-38
Place of publication: Mannheim
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Sonderforschungsbereich 504 > Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung (Laufzeit 1997 - 2008)
Subject: 330 Economics
Classification: JEL: G32 D82 ,
Subject headings (SWD): Kredit , Finanzintermediation , Bank , Agency-Theorie , Risiko , Allokation , Asymmetrische Information
Keywords (English): Debt contracts , risk sharing under asymmetric information
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.
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