Whether the safe firm can sell a bond

Reference no: EM131220819

Consider the example in given Figure with asymmetric information: the two firms know which one is risky and which is safe, but savers do not. Keep the example the same as in the figure, except for the earnings of the risky firm. For the following cases, say whether the safe firm can sell a bond, and whether the risky firm can sell a bond.

a. The risky firm's project earns $150 with probability 3/4 and 0 with probability 1/4.

b. The risky firm's project earns $150 with probability 4/5 and 0 with probability 1/5.

1585_Figure-Adverse selection.jpg

Reference no: EM131220819

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