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Optimal debt contracts and diversity of opinions: an extreme case of bunching

Author

Listed:
  • Renou, Ludovic

    (European University Institute)

  • Guillaume Carlier

Abstract

This paper studies optimal menus of debt contracts such as secured debentures or bonds, in the presence of diversity of opinions between borrowers and lenders. We first characterize incentive compatible contracts, then prove the existence of optimal debt contracts. Finally, we are able to explicitly characterize such optimal menus within a specific case: we notably show that borrowers optimally offer at most two contracts, which is an extreme case of bunching.

Suggested Citation

  • Renou, Ludovic & Guillaume Carlier, 2003. "Optimal debt contracts and diversity of opinions: an extreme case of bunching," Royal Economic Society Annual Conference 2003 172, Royal Economic Society.
    • Handle: RePEc:ecj:ac2003:172
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    More about this item

    Keywords

    debt contracts; heterogeneity of beliefs; multidimensional screening; bunching;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G3 - Financial Economics - - Corporate Finance and Governance

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