There is a borrower who wants to run a project that requires an investment of $100. If the borrower puts enough effort into her project, she will succeed with 80 percent probability and get a gross revenue of y = $170, otherwise she will fail and get nothing. If the borrower does not put in adequate effort, the probability of success falls to 60 percent. However, the effort is costly for the borrower and it takes $10.

On the lenders side, gross cost of lending $100 is $125, including $25 over-head cost. Assume that the lenders market is competitive.

Compute the threshold interest rate that the lender should charge to elicit high effort.

Will the borrowers be able to obtain the required funds from the lender? Provide the name of this phenomenon.