2. (An Alternative Model of Credit Market) Consider the following model of a credit market. There is a continuum of entrepreneurs, of total mass equal to one, each one endowed with a project. All projects require the same initial investment I, normalized so that I = 1. Projects yield a random future return, but differ in their risk-return characteristics. More specifically, projects either fail, in which case the return equals zero, or succeed, in which case the return equals R. It is assumed that R is the same for all projects, and that R > 1. Projects therefore differ only in the likelihood p with which the return R is realized. Because projects that have a higher value of p have a higher expected return, we will call them "better" projects. The projects are distributed across the borrowers according to the distribution function F(p), which is assumed to be uniform on the interval [0, 1]. Thus the best project has p = 1 and the worst project has p = 0. To be able to implement a project, entrepreneurs are entirely dependent upon the credit market. Credit is offered in the form of a standard debt contract. Such a contract specifies a repayment D on the debt issued to the firm. If a firms fails to make the repayment, it is liquidated, and the proceeds of the liquidation go to the creditor. However, the creditor never receives more than he is owed, so the maximal amount he recovers equals D. Any remainder is then kept by the firm. Liability laws also restrict the recovered amount not to exceed R. Assume that the project type p is private information to the entrepreneur. Thus creditors only know the distribution F(p), and cannot distinguish project types from each other