Sep 19, 2017

(LIQUIDITY OF ENTREPRENEUR’S CLAIM). (I) CONSIDER THE FRAMEWORK OF SECTION 4.4 (WITHOUT..

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(liquidity of entrepreneur’s claim). (i) Consider the framework of Section 4.4 (without speculative monitoring). In Section 4.4, we assumed that none of the value µrb (with µ > 1) obtained by reinvesting rb was appropriated by the entrepreneur. Assume instead that µ0rb is returned to investors, where µ0 b independently of interim investment opportunity. As in Section 4.4 we assume that the entrepreneur is rewarded with Rb only when there was no interim investment opportunity. How is the liquidity of the entrepreneur’s claim affected by µ0 > 0? (ii) Suppose now that the probability of a “liquidity shock,” i.e., a new investment opportunity, is endogenous. If the entrepreneur does not search, then λ = 0; if she searches, which involves private cost λc¯ for the entrepreneur, then λ = λ¯. Rewrite the financing constraint.


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