[Moral hazard problem] Consider a firm that will liquidate one period hence at time t=1.

Assume that there are no taxes and the firm can invest $60 in a risky venture at t=0 using

retained earnings. If the investment is not made, shareholders get a dividend of $200 at

t=0. The firm's debt requires a payment of $200 at t=1, and its investment choices are

described in the table below. For simplicity, assume that the discount rate is zero.

Payoffs related to different investment opportunities State of Nature Boom Bust Strategy (with probability 0.5) (with probability 0.5) Total firm value at t=1 if no investment made and $200 $220 $140 dividend paid at t=0 Total firm value at t=1 if $60 investment made and $140 $400 $ 10 dividend paid at t=0