lec14_with_answers_up_to_where_we_got

lec14_with_answers_up_to_where_we_got - Econ 138 Financial...

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Econ 138 Financial and Behavioral Economics Lecture 14: Asymmetric Information Market Timing, IPOs Ulrike Malmendier UC Berkeley Tu, March 11, 2008
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Organizational Items Midterm evaluation PS 3 will be posted later today, due in 1 week in class, Tu, 3/18.
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1 Corporate Financing and Asymmetric Informa- tion First type of ‘ incomplete information problem ’ = Moral Hazard. Informational problem: hidden actions, e.g., manager can shirk when she is supposed to work hard. Second type of ‘incomplete information problem’ = Asymmetric Informa- tion Informational problem: one party knows more than the other party.
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Lemons Model - Assumptions Manager / entrepreneur has investment project costing I , no cash on hand C = 0 , no (illiquid) assets A = 0 . Project is of good quality or of bad quality: Returns: good = return R w/prob. p , else return 0 ; bad = return R w/pr. q < p , else return 0 . Two cases: ( only good project creditworthy: pR > I > qR both projects creditworthy pR > qR > I Usual assumptions (risk neutrality, LL, r = 0 , perfect competition). Key new assumption : project quality = private information of entrepreneur. Investors’ prior on success probability: m αp + (1 α ) q
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Feasible fi nancial contracts: R m 0 if success; 0 if failure. 1. Benchmark: symmetric information Financing (Lending) Conditions? Answer: Good type: p ( R R g m ) I , i.e., maximum managerial rent R g m = R I p .
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