Costly state verification (original) (raw)

Costly State Verification (CSV) is an approach in contract theory that considers a contract design problem in which verification (or disclosure) of enterprise performance is costly and a lender has to pay a monitoring cost. Viewed from the CSV perspective, the main function of bankruptcy institutions is to establish a clear inventory of all assets and liabilities and to assess the net value of the firm. The solution to this problem should provide ex-ante optimal contract structure which specify in which scenario realized cash flow should be audited and certified.