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A costly state verification model with diversity of opinions

Carlier, Guillaume and Renou, Ludovic (2005) 'A costly state verification model with diversity of opinions.' Economic Theory, 25 (2). pp. 497-504. ISSN 0938-2259

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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.

Item Type: Article
Uncontrolled Keywords: Costly state verification; Heterogeneity of beliefs.
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Jim Jamieson
Date Deposited: 07 Jan 2013 11:27
Last Modified: 07 Jan 2013 11:27
URI: http://repository.essex.ac.uk/id/eprint/5012

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