What does exercise reveal about efficiency of sanctioning

Reference no: EM132174688

Quesiton: Consider the same setting as in exercise 10, and suppose that agents still have the chance to monitor their peers, but that now monitoring is imperfect: a borrower can verify her peer's return realizations with only probability q. If she can prove that her partner is lying, the defaulting partner will have to reimburse the amount R to the bank and will also be punished with a social sanction W. Create a table summarizing all possible strategies that the borrowers can follow. What does this exercise reveal about the efficiency of sanctioning only borrowers who misrepresent their returns, relative to that of excluding both borrowers if all individual debts aren't repaid?

Reference no: EM132174688

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