Use the model setup in The economics of lending with join liability: theory and practice by...
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Use the model setup in "The economics of lending with join liability: theory and practice" by Ghatak and Guinnane with YH =10,YL = 0,r=2,c=2,pa =0.7 and pb =0.3 to (i) calculate the expected payoffs of (a) a safe borrower partnering with a safe borrower, (b) a risky borrower partnering with a risky borrower, (c) a safe partner borrowing with a risky borrower, and (d) a risky borrower partnering with a safe borrower; (ii) use these to calculate the highest price a risky borrower would pay to partner with safe borrower, and the lowest price a safe borrower would accept to partner with a risky borrower; (iii) use these price calculations to explain how joint liability can help resolve the adverse selection problem discussed in the paper. Use the model setup in "The economics of lending with join liability: theory and practice" by Ghatak and Guinnane with YH =10,YL = 0,r=2,c=2,pa =0.7 and pb =0.3 to (i) calculate the expected payoffs of (a) a safe borrower partnering with a safe borrower, (b) a risky borrower partnering with a risky borrower, (c) a safe partner borrowing with a risky borrower, and (d) a risky borrower partnering with a safe borrower; (ii) use these to calculate the highest price a risky borrower would pay to partner with safe borrower, and the lowest price a safe borrower would accept to partner with a risky borrower; (iii) use these price calculations to explain how joint liability can help resolve the adverse selection problem discussed in the paper.
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