This question considers the version of the Holmstr$$m and Tirole $(1997)$ model discussed

in class.

i Consider first the case of direct investment $($i$.$e$.$ uniformed investors$).$ Show that

entrepreneurs need to have a minimum amount of net worth, A$,$ in order to start the

project.

ii Now consider the introduction of a financial intermediary. Show that there is a

minimum amount of capital, IB $,$ that banks have to contribute to the projects for

there to be active monitoring.

iii Assume that b $+$ c $$ B$.$ Compare a firm$$s pledgeable income with or without banks.

Show that in this case, it is possible for banks to possess zero capital yet they still

take part in monitoring. What happens if b $+$ c $>$ B$?$

iv What happens for entrepreneurs if A $$ A yet A $+$ IB $>$ I?Question $4$

This question considers the version of the Holmstr$$m and Tirole $(1997)$ model discussed

in class.

i Consider first the case of direct investment $($i$.$e$.$ uniformed investors$).$ Show that

entrepreneurs need to have a minimum amount of net worth, $\frac{?}{\text{b}\text{a}\text{r}}(A),$ in order to start the

project.

ii Now consider the introduction of a financial intermediary. Show that there is a

minimum amount of capital, $I_B,$ that banks have to contribute to the projects for

there to be active monitoring.

iii Assume that $b+c>BA\frac{?}{b}Ib+c.$ Compare a firm's pledgeable income with $or$ without banks.

Show that $in$ this case, $itis$ possible for banks $to$ possess zero capital yet they still

take part $in$ monitoring. What happens $ifb+c>B?$

$iv$ What happens for entrepreneurs $ifA\frac{?}{b}$I $?$