This is an exercise on microcredit as a substitute for collateral. Take the same assumptions as in
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This is an exercise on microcredit as a substitute for collateral. Take the same assumptions as in the previous two exercises on the safe and risky projects. Now assume that there are two borrowers, A and B. Assume that the size of the loan is 1 and that the interest rate is r. Also assume that A has limited liability. What is the minimum size of B's liability in case A defaults on his loan, so that B can convince A to choose the safe loan?
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In this scenario we have two borrowers A and B and we want to determine the minimum size of Bs liabi...View the full answer
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