Organizational Items•Chairs•Reminder: Problem Set 1 due next class (Tu, 2/5)•Updated syllabus (show)
1Moral Hazard(A reminder of set-up from last class:)•Firm has a (known, non-random) investment return functionR(I), whereIis the cost of the investment andRis defined on[0,∞),R0>0,R00<0.; existing assetsA; andsshares of stock outstanding.•Ris ‘common knowledge.’ (CEO and investors knowR.)•Twofinancing options.—Using cashflowC, which isflowing in from previous projects.—Issuings0shares of stock.—(We ignore debtfinancing for now to keep things simple.)•Interest rate normalized to0.•Competitive market for externalfinancing: outside investors demand zeroreturns.
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