Sep 19, 2017


This paper concentrates on the primary theme of (MAINTENANCE OF COLLATERAL AND ASSET DEPLETION JUST BEFORE DISTRESS). THIS EXERCISE ANALYZES THE… in which you have to explain and evaluate its intricate aspects in detail. In addition to this, this paper has been reviewed and purchased by most of the students hence; it has been rated 4.8 points on the scale of 5 points. Besides, the price of this paper starts from £ 40. For more details and full access to the paper, please refer to the site.

(maintenance of collateral and asset depletion just before distress). This exercise analyzes the impact of the existence of a privately received signal about distress on credit rationing. Consider the model of Section 4.3.4 with A = A (so the asset has the same value for the borrower and the lender). The new feature is that the resale value of the asset is A only if the borrower invests in maintenance; otherwise the final value of the asset is 0, regardless of the state of nature. The loan agreement cannot monitor the borrower’s maintenance decision (but the resale value is verifiable). So, there are two dimensions of moral hazard for the borrower. The borrower incurs private disutility c

(ii) Suppose now that with probability ξ in the case of failure the borrower privately learns that failure will occur with certainty. With probability (1 − ξ) in the case of failure and with probability 1 in the case of success, no signal accrues. (ξ = 0 corresponds to question (i).) The signal, if any, is received after the choice between pH and pL but before the maintenance decision. Suppose further that the asset is pledged to the lenders only in the case of failure. Show that, if the entrepreneur is poor and c is “not too large,” constraint (ICb) must now be written

Interpret this inequality. Find a necessary and suffi- cient condition for the project to be funded. (iii) Keeping the framework of question (ii), when is it better not to pledge the asset at all than to pledge it in the case of failure?

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