Abstract
This paper derives equilibrium financial contract forms in a risk-neutral capital market with asymmetrically informed borrowers/entrepeneurs and investors. In doing so, the analysis generalizes the work of DeMeza and Webb (1987) by allowing for arbitrary profit distributions, arbitrary contract forms and variable investment choices. The main result of this inquiry is as follows. When higher-quality entrepreneurs have 'better' ex post profit distributions (in the sense of the monotone likelihood ratio property), equilibrium contracts take a standard debt form so long as admissible investor payoff functions are monotone non-decreasing in firm profit. Without the monotonicity constraint, contracts often take a different, 'live-or-die' form.
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