Game Theory

Use the model setup in \"The economics of lending with join liability: theory and practice\" by Ghatak and Guinnane with Y\" = 10,YL = 0,1' = 2,c = 2,39,, = 0.7 and pb = 0.3 to (i) calculate the expected payoffs of (a) a safe borrower partnering with a safe borrower, (b) a risky borrower partnering with a risky borrower, (c) a safe partner borrowing with a risky borrower, and (d) a risky borrower partnering with a safe borrower; (ii) use these to calculate the highest price a risky borrower would pay to partner with safe borrower, and the lowest price a safe borrower would accept to partner with a risky borrower; (iii) use these price calculations to explain how joint liability can help resolve the adverse selection problem discussed in the paper