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There are two types of potential borrowers in equal numbers among the population. All haveprojects that...

There are two types of potential borrowers in equal numbers among the population. All haveprojects that require an investment of $100, which must be borrowed. Type A projects yield agross return of $130 in one year with probability .8; they fail and yield 0 with probability .2. Type B projects yield a gross rate of return of $250 with probability.4, but fail, yielding zero,with probability .6.Potential lenders require an expected gross return of $102 on $100 loaned. With symmetricinformation, who will get financing and why? Now suppose the project expected returns areprivate information. Lenders cannot distinguish one type from another. Will any lending occur?Why or why not? Explain in detail.

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Rahul Sunny answered 1 year ago
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