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Consider the financial-market imperfection model with asymmetric information. The firm needs one unit of capital to start a project that will produce y distributed
Consider the financial-market imperfection model with asymmetric information. The firm needs one unit of capital to start a project that will produce y distributed uniformly over [0,2]. The firm owns W 1+r. 1) Suppose both the firm and the bank can observe y perfectly. Can you propose a feasible contract that makes borrowing possible? 2) Suppose the bank can only observe y with a cost C. Can you propose a feasible contract that makes borrowing possible? You can make your own assumptions on parameter values. 3) Based on your answer to 2), mark the area in a W-y diagram that represents the collection of (W, y) value combinations with which an investment project will be funded.
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