This paper presents a new approach for modeling an optimal debt contract. It examines a competitive contract design in a continuous-time environment with Markov income shocks and costly verifiable information. It shows that an ex ante optimal contract has the form of a debt contract that...

We provide a theoretical and numerical framework to study optimal insurance design under asymmetric information. We consider a continuous-time model where neither the efforts nor the outcome of an insured firm are observable to an insurer. The insured may then cause two interconnected...

This paper studies a strategic role of debt restructuring under an optimal debt contract. It explores an infinite-horizon costly-monitoring model under Markov income shocks. It shows that, if (1) a borrower's project is expected to be profitable, (2) a lender's outside options are positively...

This paper studies a strategic role of debt restructuring under an optimal debt contract. It explores an infinite-horizon costly-monitoring model under Markov income shocks. It shows that, if (1) a borrower's project is expected to be profitable, (2) a lender's outside options are positively...

This paper presents a new approach for modeling continuous-time defaultable debt contracts. It studies an optimal competitive debt contract in continuous time by exploring a dynamic costly monitoring model under asymmetric information in a common-agency setting. It shows that, under an optimal...