Acta Oeconomica Pragensia 2006, 14(3):34-47 | DOI: 10.18267/j.aop.84

Agency Theory Approach to the Contracting between Lender and Borrower

Karel Janda
Doc. Ing. Karel Janda, Ph.D. - Transgas-RWE Group Chair in Economics; Department of Microeconomics and Mathematical Methods, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00 Praha 1, Czech Republic; Associate Professor; Department of Banking and Insurance, Faculty of Finance and Accounting, University of Economics, Prague, nám. W. Churchilla 4, 130 67 Praha 3, Czech Republic, karel-janda@seznam.cz

The paper provides an overview of several selected topics dealing with application of agency theory to the credit contracts. The costly state verification and costly punishment models of optimal debt contracts are introduced and compared with respect to their performance in the situation characterized by risk aversion. Adverse selection in credit markets and its solution with a menu of screening contracts is described and the use of collateral as a screening instrument is discussed. The dynamic relationship between the lender and borrower is introduced in a soft budget constraint model of default and bankruptcy decisions. Alternative assumptions about informational asymmetries in credit markets are presented as well. For all these topics a number of references from Czech and international economic literature is provided.

Keywords: principal, agent, contracts, credit, adverse selection, moral hazard
JEL classification: C72, D82, G21

Published: October 1, 2006  Show citation

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Janda, K. (2006). Agency Theory Approach to the Contracting between Lender and Borrower. Acta Oeconomica Pragensia, 14(3), 34-47. doi: 10.18267/j.aop.84
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