A bank faces a pool of high and low risk borrowers with measure one in two successive periods. In each period, each borrower wishes to borrow 1 from the bank. A low-risk borrower's project returns G = 2 with probability pg = 0.8 and high- risk borrower's project yields B = 3 with probability p = 0.2 in each period. If a project is unsuccessful, it yields zero. The bank knows that the proportion of low-risk borrowers is y = 0.5. However, the bank is unable to distinguish between low and high-risk borrowers, i.e. it doesn't have an appropriate screening technology. Consider a bank which operates as a monopoly and wants to attract both types of borrowers in the first period.

A bank faces a pool of high and low risk borrowers with measure one in two successive periods. In each period, each borrower wishes to borrow 1 from the bank. A low-risk borrower's project returns G = 2 with probability pg = 0.8 and high- risk borrower's project yields B = 3 with probability p = 0.2 in each period. If a project is unsuccessful, it yields zero. The bank knows that the proportion of low-risk borrowers is y = 0.5. However, the bank is unable to distinguish between low and high-risk borrowers, i.e. it doesn't have an appropriate screening technology. Consider a bank which operates as a monopoly and wants to attract both types of borrowers in the first period.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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