A Debt Contract Is Incentive Compatible

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.