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Optimal Lending Contracts under both Adverse Selection and Moral Hazard

Abstract : This paper deals with financial contracting between a lender and a borrower with a project to finance. The borrower is protected by limited liability. We consider that the revenue from the project is observable and verifiable but its distribution is influ- 10 enced by both the borrower’s choice of action and the project’s quality, which are private information. We find that debt contracts are endogenously optimal, as under moral hazard alone. Moreover, while moral hazard leads to credit rationing for the lowest-quality projects only, adding adverse selection creates a bang-bang result: either all projects or none are credit rationed.
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Submitted on : Wednesday, April 27, 2016 - 3:42:21 PM
Last modification on : Thursday, January 13, 2022 - 11:58:21 AM


  • HAL Id : halshs-01308331, version 1



Christian At, Lionel Thomas. Optimal Lending Contracts under both Adverse Selection and Moral Hazard. Oxford Economic Papers, Oxford University Press (OUP), 2015, forthcoming. ⟨halshs-01308331⟩



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