A Debt Contract Is Incentive Compatible

question 87

Multiple Choice

A debt contract is incentive compatible

• A)if the borrower has the incentive to behave in the way that the lender expects and desires,since doing otherwise jeopardizes the borrower's net worth in the business.
• B)if the borrower's net worth is sufficiently low so that the lender's risk of moral hazard is significantly reduced.
• C)if the debt contract is treated like an equity.
• D)if the lender has the incentive to behave in the way that the borrower expects and desires.

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