Suppose Brown Bakery needs a $100 loan to finance a project that will pay off next period. Brown can choose between two projects: S (safe) and R (risky). The bank knows this but is unable to directly control the borrower’s choice of project. S will yield a payoff of $300 with probability 0.9 and nothing with probability 0.1, and R will yield a payoff of $400 with probability 0.6 and nothing with probability 0.4. Everybody is risk neutral and the riskless rate is 10%. How should the bank design its loan contract so that Brown will choose the safer project? Assume once again that collateral worth $1 to Brown is worth 90 cents to the bank.