Standard loan contract to complete the project

Assignment Help Operation Management

Reference no: EM131371620

A project cost $100 yields a gross return of $110. A lender (player 1) is approached by a debtor (player 2) requesting a standard loan contract to complete the project. If the lender chooses not to offer a loan, then both parties earn nothing. If the lender chooses to offer a loan of $100, the debtor can realize the project's gains and is obliged by contract to repay $105. For simplicity assume that money is continuous and the debtor can choose to return any amount of money x \leq110. Ignore the time value of money. Assume first that no legal system is in place that can compel the debtor to repay, so the default on the loan (less than full repayment) carries no repercussions for the debtor. model this as an extensive form game tree as best you can and find a subgame perfect equilibrium of this game. Is it unique? Now assume that there is a legal system in place that allows the lender to voluntarily choose whether or not to sue when the debtor defaults and repays an amount x < 105. Furthermore assume that it is costless to use the legal system (it is supplied by the state), and if the lender sues a debtor that defaulted, the lender will get the $105 repaid in full. After paying the lender, the borrower will pay a fine of $5 to the court, above and beyond the repayment. Model this as an extensive form game tree as best you can and find a subgame perfect equilibrium of this game. Is it unique? Are there Nash Equilibria in the game described in (b) that are not subgame- perfect equilibria? Now assume that using the legal system is costly; if the lender sues, he pays lawyers a legal fee of $105 (this is the lawyer's price; it is unrelated to the contract). The rest of the game proceeds as before. (If the lender sues a debtor that defaulted, the lender will be repaid in full; after paying the lender, the borrower will pay a fine of $5 above and beyond the repayment.) Model this as an extensive-form game tree as best you can and find a subgame perfect equilibrium of this game. Is it unique? Are there Nash Equilibria in the game described in (d) that are not subgame-perfect equilibria? Now assume that a change in the law is proposed: upon default, if a debtor is sued he has to repay the lender $105 and then pay the legal fees of $105 above and beyond repayment of the loan, and no extra fine is imposed. Should the lender be willing to pay to have this change in the law enacted. If so, how much? If you were a social planner, would you implement the suggested law?

Reference no: EM131371620

Questions Cloud

Differentiate between explicit knowledge and tacit knowledge : Provide some best practices information about the ways that employers can protect themselves from lawsuits. Please go beyond stating that the employer should follow the law. Identify the three major types of controls that organizations can use to pr..

Would you purchase this toy for your child : Write a thesis driven essay using at least 2 quotes/passages from reading assignments in response to the following question:- what does your analysis of your section and toy reveal about a toy'a role in a child's life? Would you purchase this toy ..

Name of the value that can be calculated : What is the name of the value that can be calculated that expresses with a number how precise and how accurate each group is?

Compare the operations of a ctu and a ctd counter : Explain how you go about creating tags for an Up/ Down counter that uses a CTU and CTD instruction.

Standard loan contract to complete the project : A project cost $100 yields a gross return of $110. A lender (player 1) is approached by a debtor (player 2) requesting a standard loan contract to complete the project. If the lender chooses not to offer a loan, then both parties earn nothing. If the..

Determining the value of magnesium fluoride : Use the following data to estimate ΔHf° for magnesium fluoride.

Have unions served their purpose : The percentage of the workplace that is a part of a union has been decreasing for decades (especially in the private sector). Many laws have been passed that give employees rights that unions cared deeply about, e.g., FMLA, OSH Act, FSLA etc. Does th..

Working the system - one cancer patients story : Comment on the way Assurant handled Mr. Mannett's bills - Comment on the way the providers handled Mr. Mannett's bills

Calculate mean standard deviation and variance of systolic : Calculate mean, standard deviation, and variance of the systolic and diastolic blood pressure measurements using the formulas provided in the course text. In your write-up, show the formulas you use to calculate each statistic.

User Account

All Pages