Summary.
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.
Article PDF
Similar content being viewed by others
Avoid common mistakes on your manuscript.
Author information
Authors and Affiliations
Corresponding author
Additional information
JEL Classification Numbers:
G3, D8.
Rights and permissions
About this article
Cite this article
Carlier, G., Renou, L. A costly state verification model with diversity of opinions. Economic Theory 25, 497–504 (2005). https://doi.org/10.1007/s00199-003-0429-5
Received:
Revised:
Issue Date:
DOI: https://doi.org/10.1007/s00199-003-0429-5