We develop a dynamic model of debt contracts with adverse selection and after a crisis, and the constructive economic downturn. lenders to run businesses whose returns depend on entrepreneurial productivity and common productivity. The entrepreneurial productivity is the entrepreneur’s private information, and the lender constructs beliefs about the entrepreneur’s productivity based on the entrepreneur’s business operation history, common productivity history, and terms of the contract. The model provides insights on the dynamic and cross-sectional relation between firm age and credit risk, cyclical asymmetry of the business cycle, slow recovery after a crisis, and the constructive economic downturn.​

J.E.L. Classification: C78, D82, D86, E44, G23
Keywords: Adverse selection, Bayesian learning, Debt contracts, Belief update