Question 2 An entrepreneur has to finance a project of fixed size 1. The entrepreneur has "cash-on-hand" A, where A 0, or fails, in which case it delivers a zero return. The probability of success depends on the effort exerted by the entrepreneur: if the entrepreneur exerts high effort, the probability of success is equal to ph; if the entrepreneur exerts low effort, the probability of success is equal to PL, where Ap = pn-pt> 0. If the entrepreneur exerts low effort, she also obtains a private benefit B > 0, while there is no private benefit when the entrepreneur exerts high effort. Define as Rs the amount of profit going to the entrepreneur, and as R the amount of profit going to the lenders in case of success, where R= Rs + RL. 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. (e) Consider now the case in which the entrepreneur has borrowed 1 - A from 'initial lenders and has commited to pay them some Ri=R-R, where Rs must satisfy IC- However, before deciding whether to exert high or low effort, the entrepreneur froes the opportunity to deepen the investment at a cost J. If undertaken, this new investment raises the probability of success to pu + 1 in case of high effort, and to PL ++ in case of low effort, for some > 0. Also, if the new investment is undertaken, the entrepreneur receives a private benefit B' in case she exerts low effort, where B' > B. Let us assume that TR-J 0, or fails, in which case it delivers a zero return. The probability of success depends on the effort exerted by the entrepreneur: if the entrepreneur exerts high effort, the probability of success is equal to ph; if the entrepreneur exerts low effort, the probability of success is equal to PL, where Ap = pn-pt> 0. If the entrepreneur exerts low effort, she also obtains a private benefit B > 0, while there is no private benefit when the entrepreneur exerts high effort. Define as Rs the amount of profit going to the entrepreneur, and as R the amount of profit going to the lenders in case of success, where R= Rs + RL. 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. (e) Consider now the case in which the entrepreneur has borrowed 1 - A from 'initial lenders and has commited to pay them some Ri=R-R, where Rs must satisfy IC- However, before deciding whether to exert high or low effort, the entrepreneur froes the opportunity to deepen the investment at a cost J. If undertaken, this new investment raises the probability of success to pu + 1 in case of high effort, and to PL ++ in case of low effort, for some > 0. Also, if the new investment is undertaken, the entrepreneur receives a private benefit B' in case she exerts low effort, where B' > B. Let us assume that TR-J