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The Lender-Borrower Relationship with Risk Averse Lenders

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Abstract

This paper analyzes optimal incentive compatible debt contracts when lenders are risk averse. The decisive factor in this regard is that risk aversion requiresto consider further sources of risk the lenders are exposed to. The main resultsderived in a setting of asymmetric information – the payment obligation ofthe optimal incentive compatible contract increases due to risk aversion oflenders which is reinforced by the introduction of a further source of risk – areshown to be in line with the results from the industrial organization approachof banking. Moreover, the results of the present paper are more general thanthe ones from the industrial organization approach.

Suggested Citation

  • Thilo Pausch, 2003. "The Lender-Borrower Relationship with Risk Averse Lenders," Discussion Paper Series 244, Universitaet Augsburg, Institute for Economics.
    • Handle: RePEc:aug:augsbe:0244
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    File URL: https://vwl.wiwi.uni-augsburg.de/vwl/institut/paper/244.pdf
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    References listed on IDEAS

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    8. Gorton, Gary & Winton, Andrew, 2003. "Financial intermediation," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 8, pages 431-552, Elsevier.
    9. Thilo Pausch & Peter Welzel, 2002. "Credit Risk and the Role of Capital Adequacy Regulation," Discussion Paper Series 224, Universitaet Augsburg, Institute for Economics.
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    Cited by:

    1. Thilo Pausch, 2005. "Credit Risk, Credit Rationing, and the Role of Banks: The Case of Risk Averse Lenders," Discussion Paper Series 271, Universitaet Augsburg, Institute for Economics.

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    More about this item

    Keywords

    debt contracts; risk aversion; costly state verification; risk;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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