We argue that standard results proving that debt contracts can be obtained
as the solution of an ex post adverse selection problem are derived without
borrowers' preferences satisfying a proper single crossing condition. For
a simple example where this condition is restored, we show that the optimal
financial contract is not a standard debt contract, but rather an option c
ontract. This casts some doubts on the robustness of existing results. (C)
1999 Elsevier Science S.A. All rights reserved.