Question
Firms with safe and risky projects exist in equal numbers. A safe investment of $100 turns into $110 with certainty. A risky investment is equally
Firms with safe and risky projects exist in equal numbers. A safe investment of $100 turns into $110 with certainty. A risky investment is equally likely to turn $100 into $212 or $0. Everyone is risk-neutral and the risk-free rate is 4 percent.
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Is the safe project efficient? Is the risky project efficient?
Start by assuming symmetric information.
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Does the market for safe bonds exist? Does the market for risky bonds exist?
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In equilibrium, putting $100 into safe bonds buys how much face value? How about risky bonds?
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