Sep 18, 2017

(RANDOM PRIVATE BENEFITS). CONSIDER THE VARIABLE-INVESTMENT MODEL: AN ENTREPRENEUR INITIALLY HA

This paper concentrates on the primary theme of (RANDOM PRIVATE BENEFITS). CONSIDER THE VARIABLE-INVESTMENT MODEL: AN ENTREPRENEUR INITIALLY HA 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.

(random private benefits). Consider the variable-investment model: an entrepreneur initially has cash A. For investment I, the project yields RI in the case of success and 0 in the case of failure. The probability of success is equal to pH ∈ (0, 1) if the entrepreneur works and pL = 0 if the entrepreneur shirks. The entrepreneur obtains private benefit BI when shirking and 0 when working. The per unit private benefit B is unknown to all ex ante and is drawn from (common knowledge) uniform distribution F:

with density f (B)ˆ = 1/R. The entrepreneur borrows I − A and pays back R1 = r1 in the case of success. The timing is described in Figure 3.10. (i) For a given contract (1, r1), what is the threshold B∗, i.e., the value of the private per-unit benefit above which the entrepreneur shirks? (ii) For a given B∗ (or equivalently r1, which determines B∗), what is the debt capacity? For which value of B∗ (or r1) is this debt capacity highest? (iii) Determine the entrepreneur’s expected utility for a given B∗. Show that the contract that is optimal for the entrepreneur (subject to the investors breaking even) satisfies

Interpret this result. (iv) Suppose now that the private benefit B is observable and verifiable. Determine the optimal contract between the entrepreneur and the investors (note that the reimbursement can now be made contingent on the level of private benefits



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