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with mean i and variance . The net return is therefore (). The entrepreneur is endowed with wealth equal Wo > 1. The entrepreneur maximizes
with mean "i and variance . The net return is therefore (). The entrepreneur is endowed with wealth equal Wo > 1. The entrepreneur maximizes expected utility Zulu) and * is given by: where w is the entrepreneur's ex-post wealth and P is risk aversion coeffi cient. For distributed normally with mean "72 and variance , the expected utility is Eu(w) = -e Am Azz ) B. Assume there are no outside investors so that the entrepreneur's choice is between ( i) sitting on wealth Wo and (1) self-financing the project. Under what relationship between m and ' would the entrepreneur choose (ii)? b. Assume a risk-neutral, competitive lender is offering to partially finance the project. The lender offers to pay P for share " of the project's revenue 1+ R(). What is p (@) if the lender makes expected zero profit? C. For any a between 0 and I we can imagine similar financial contract with price P(@). For which " would such contract be socially effi cient? Be clear about how you define social effi cienc Assume there are two types of entrepreneurs. Fraction Ta of projects has expected net return & while 1 - " of projects have return S where o > 8. Information about type is asymmetric: types are indistinguishable to the lender but entrepreneurs know their own . d. Answer question b. in this case: what is or a given * as in (b), and assuming both types accept price offered by the lender, what is the price of equity? e. Give conditions under which each of types accepts the price for share o. f. Given TA:0, 0, what is the socially optimal "7 Define what you mean by "socially optimal." B. Discuss verbally how the equlibrium may look like when there are three types of entrepreneurs: Of
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