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Derive a rational expectations equilibrium

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Reguired:

a) Derive a rational expectations equilibrium (REE) in which investors' rational beliefs at time 1:0 are consistent with the management's actions at time i=0. Show your calculations in detail and comment on your results.

b) Compute the value of the firm at time t=-1. Compare this to the value of the firm at time t=-1 with symmetric information, i.e. assuming that the managers and the outside investors simultaneously observe firm type at time t=0. Explain the difference (if any).

Reference no: EM133116475

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