Peer Monitoring Finance Assingment Help With Solution

Peer Monitoring Finance Assingment Help With Solution

1.(peer monitoring). The peer monitoring model studied in the supplementary section assumes that the projects are independent. Suppose instead that they are (perfectly) correlated. (See Sections 3.2.4 and 4.2. There are three states of nature: favorable (both projects always succeed), unfavorable (both projects always fail), and intermediate (a project succeeds if and only if the entrepreneur behaves), with respective probabilities pL, 1 − pH, and ∆p.) (i) Replace the limited liability assumption by {no limited liability, but strong risk aversion for Rb
 
Assume that Find a condition under which the agents can secure funding.
 
2. (borrower-friendly bankruptcy court). Consider the timing described in Figure 4.7. The project, if financed, yields random and verifi- able short-term profit r ∈ [0, r ] (with a continuous density and ex ante mean E[r ]). After r is realized and cashed in, the firm either liquidates (sells its assets), yielding some known liquidation value L > 0, or continues. Note that (the random) r and (the deterministic) L are not subject to moral hazard. If the firm continues, its prospects improve with r (so r is “good news” about the future). Namely, the probability of success is pH(r ) if the entrepreneur works between dates 1 and 2 and pL(r ) if the entrepreneur shirks. Assume that , and is independent of r (so shirking reduces the probability of success by a fixed amount independent of prospects). As usual, one will want to induce the entrepreneur to work if continuation obtains. It is convenient to use the notation
 
Investors are competitive and demand an expected rate of return equal to 0. Assume
 
(i) Argue informally that, in the optimal contract for the borrower, the short-term profit and the liquidation value (if the firm is liquidated) ought to be given to investors. Argue that, in the case of continuation, Rb = B/∆p. (If you are unable to show why, take this fact for granted in the rest of the question.) Interpret conditions (1) and (2). (ii) Write the borrower’s optimization program. Assume (without loss of generality) that the firm continues if and only if r r ∗ for some r ∗ ∈ (0,r). Exhibit the equation defining r ∗. (iii) Argue that this optimal contract can be implemented using, inter alia, a short-term debt contract at level d = r∗. Interpret “liquidation” as a “bankruptcy.” How does short-term debt vary with the borrower’s initial equity? Explain. (iv) Suppose that, when the decision to liquidate is taken, the firm must go to a bankruptcy court. The judge mechanically splits the bankruptcy proceeds L equally between investors and the borrower. Define rˆ by (where r∗ is the value found in question (ii)). Show that the borrower-friendly court actually prevents the borrower from having access to financing. (Note: a diagram may help.) (v) Continuing on question (iv), show that when the borrower-friendly court either prevents financing or increases the probability of bankruptcy, and in all cases hurts the borrower and not the lenders.

 
 
3.benefits from diversification with variable-investment projects). An entrepreneur has two variable-investment projects i ∈ {1, 2}. Each is described as in Section 3.4. (For investment level Ii , project i yields RIi in the case of success and 0 in the case of failure. The probability of success is pH if the entrepreneur behaves (and thereby gets no private benefit) and pL = pH − ∆p if she misbehaves (and then obtains private benefit BIi ). Universal risk neutrality prevails and the entrepreneur is protected by limited liability.) The two projects are independent (not correlated). The entrepreneur starts with total wealth A. Assume
 
(i) First, consider project finance (each project is financed on a stand-alone basis). Compute the borrower’s utility. Is there any benefit from having access to two projects rather than one?
 
(ii) Compute the borrower’s utility under crosspledging.
 
4. (optimal sale policy). Consider the timing in Figure 4.8. The probability of success s is not known initially and is learned publicly after the investment is sunk. If the assets are not sold, the probability of success is s if the entrepreneur works and s − ∆p if she shirks (in which case she gets private benefit B). Assume that the (state-contingent) decision to sell the firm to an acquirer can be contracted upon ex ante. It is optimal to keep the entrepreneur (not sell) if and only if s ≥ s∗ for some threshold s∗. (Assume in the following that s has a wide enough support and that there are no corner solutions. Further assume that, conditional on not liquidating, it is optimal to induce the entrepreneur to exert effort. If you want to show off, you may derive a sufficient condition for this to be the case.) As is usual, everyone is risk neutral, the entrepreneur is protected by limited liability, and the market rate of interest is 0.
 
(i) Suppose that the entrepreneur’s reward in the case of success (and, of course, continuation) is
Rb = B/∆p. Assuming that the financing constraint is binding, write the NPV and the investors’ breakeven constraint and show that for some µ > 0. Explain the economic tradeoff. (ii) Endogenize Rb(s) assuming that effort is to be encouraged and show that indeed Rb(s) = B/∆p for all s. What is the intuition for this “minimum incentive result”? (iii) Suppose now that s can take only two values, s1 and s2, with s2 > s1 and Introduce a first-stage moral hazard (just after the investment is sunk). The entrepreneur chooses between taking a private benefit B0, in which case s = s1 for certain, and taking no private benefit, in which case s = s2 for certain. Assume that financing is infeasible if the contract induces the entrepreneur to misbehave at either stage. What is the optimal contract? Is financing feasible? Discuss the issue of contract renegotiation
 
5. conflict of interest and division of labor). Consider the timing in Figure 4.9. The entrepreneur (who is protected by limited liability) is assigned two simultaneous tasks (the moralhazard problem is bidimensional):
 
• The entrepreneur chooses between probabilities of success pH (and then receives no private benefit) and pL (in which case she receives private benefit B).
 
• The entrepreneur is in charge of overseeing that the asset remains attractive to external buyers
in the case where the project fails and the asset is thus not used internally. At private cost c, the entrepreneur maintains the resale value at level L. The resale value is 0 if the entrepreneur does not incur cost c. The resale value is observed by the investors if and only if the project fails. Let Rb denote the entrepreneur’s reward if the project is successful (by assumption, this reward is not contingent on the maintenance performance); Rˆb is the entrepreneur’s reward if the project fails and the asset is sold at price L; last, the entrepreneur (optimally) receives nothing if the project fails and the asset is worth nothing to external buyers. The entrepreneur and the investors are risk neutral and the market rate of interest is 0. Assume that to enable financing the contract must induce good behavior in the two moral-hazard dimensions.
 
(i) Write the three incentive compatibility constraints; show that the constraint that the entrepreneur does not want to choose pL and not maintain the asset is not binding.
 
(ii) Compute the nonpledgeable income. What is the minimum level of A such that the entrepreneur can obtain financing?
 
(iii) Suppose now that the maintenance task can be delegated to another agent. The latter is also risk neutral and protected by limited liability. Show that the pledgeable income increases and so financing is eased

Product Code :Fin329

To get answer for this question, kindly click here (Note: Don’t forget to write the product code in comment section)

You can also email us at assignmentconsultancy.help@gmail.com but please mentioned product code in the mail body while sending emails.You can browse more questions to get answer in our Q&A sections here.