A costly state verification model with diversity of opinions |
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| Authors: | Guillaume Carlier Ludovic Renou |
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| Affiliation: | (1) Université Bordeaux I, MAB, UMR CNRS 5466 and Université Bordeaux IV, GRAPE, UMR CNRS 5113, Avenue Léon Duguit, 33608 Pessac, FRANCE;(2) Economics Department, European University Institute, Villa San Paolo, Via della Piazzuola, 50133 Florence, ITALY;(3) CODE, Universitat Autonoma de Barcelona, 08193 Bellaterra (Barcelona), SPAIN |
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| Abstract: | 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.JEL Classification Numbers: G3, D8. |
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| Keywords: | Costly state verification Heterogeneity of beliefs. |
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