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An entrepreneur has to nance a project of xed size I. The entrepreneur has cashonhand A, where A 0, or fails, in which case it

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An entrepreneur has to nance a project of xed size I. The entrepreneur has \"cashonhand\" A, where A 0, or fails, in which case it delivers a zero return. The probability of success depends on the eifort exerted by the entrepreneur: if the entrepreneur exerts high effort, the probability of success is equal to p H; if the entrepreneur exerts low effort, the probability of success is equal to 391;, where Ap = pH pl; > 0. If the entrepreneur exerts low effort, she also obtains a private benet B > 0, while there is no private benet when the entrepreneur exerts high effort. Dene as R5 the amount of prot going to the entrepreneur, and as R; the amount of prot going to the lenders in case of success, where R = By, + R;. We assume both players obtain zero in case the project fails. All the players are risk neutral and there is limited liability for the entrepreneur. Lenders behave competitively, and both entrepreneur and lenders receive zero if the project fails. (a) Write down the \"breakeven constrain \" for the lenders assuming that the entrepreneur exerts high effort. (10% of the marks) (b) Write down the entrepreneur's \"Incentive Compatibility Constraint\" (I 05) and derive the minimum level of R5 such that the entrepreneur exerts high effort. (10% of the marks) (c) What is the highest level of income that the entrepreneur can pledge to investors? (10% of the marks) ((1) Compute the minimum level of cash-onhand E the entrepreneur must have to be - nanced. Why are entrepreneurs with low cash-onhand likely to be denied nancing? Explain your answer. (20% of the marks) (e) Let us dene as R: and R: the return for the entrepreneur in case of success and failure, respectively. Recall that the limited liability for the entrepreneur implies that R: 2 0 and R: 2 0. Suppose the entrepreneur sets R: > 0. Does the pledgeable income increase or decrease with respect to the case in which R: = O? Show your work. (20% of the marks) (f) Suppose now that the entrepreneur has no cashinhand (A = 0). We assume Z 0 by some \"initial\" investors. If the project of size I is nanced, the entrepreneur

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