We provide a characterization of the optimal loan contract with costly state verification for the bank when the entrepreneur is risk averse and holds a belief different from that of the bank. While the optimality problem is formally infinite dimensional, under realistic assumptions it becomes finite dimensional. We provide conditions and examples to show that when the borrower is more optimistic than the bank, there may be only one verification region. A simple example, based on Bernanke and Gertler (1989), shows that as the borrower becomes more optimistic the financial accelerator (Bernanke et al., 1999) becomes more potent.

Nielsen, C. K., The Loan Contract with Costly State Verification and Subjective Beliefs, <<MATHEMATICAL SOCIAL SCIENCES>>, 2015; 2015 (78): 89-105 [http://hdl.handle.net/10807/71504]

The Loan Contract with Costly State Verification and Subjective Beliefs

Nielsen
2015

Abstract

We provide a characterization of the optimal loan contract with costly state verification for the bank when the entrepreneur is risk averse and holds a belief different from that of the bank. While the optimality problem is formally infinite dimensional, under realistic assumptions it becomes finite dimensional. We provide conditions and examples to show that when the borrower is more optimistic than the bank, there may be only one verification region. A simple example, based on Bernanke and Gertler (1989), shows that as the borrower becomes more optimistic the financial accelerator (Bernanke et al., 1999) becomes more potent.
Inglese
Nielsen, C. K., The Loan Contract with Costly State Verification and Subjective Beliefs, <<MATHEMATICAL SOCIAL SCIENCES>>, 2015; 2015 (78): 89-105 [http://hdl.handle.net/10807/71504]
File in questo prodotto:
File Dimensione Formato  
MATSOC1331.pdf

non disponibili

Tipologia file ?: Versione Editoriale (PDF)
Licenza: Non specificato
Dimensione 492.42 kB
Formato Unknown
492.42 kB Unknown   Visualizza/Apri

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10807/71504
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 1
  • ???jsp.display-item.citation.isi??? 1
social impact