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.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 647-663 |
| Number of pages | 17 |
| Journal | Discovery Medicine |
| Volume | 12 |
| Issue number | 63 |
| State | Published - 2011 |
ASJC Scopus subject areas
- General Medicine