A well known car manufacturer is requesting a loan from your bank to invest in a new production line for a particular component that will gen- erate signicant gains to assembly line eciency. However, they also have a reputation for starting very complex new projects that go well beyond their initial goals, and rarely deliver on time.

a) What particular instance of asymmetric information is being described above? Provide a very brief characterisation of this problem.

b) Give two examples of ways your bank could try to prevent this problem from emerging and briey discuss why they would work.