Question: Consider the following model in which there are two types of CMBS issuers: Good and Bad. Bad issuers always securitize lemons, whereas Good issuers securitize

Consider the following model in which there are two types of CMBS issuers: Good and Bad. Bad issuers always securitize lemons, whereas Good issuers securitize high quality mortgages. The issuer types are represented by T and are uniformly distributed with support on [0,1]. Issuers with T closer to 0 are worse than issuers with T closer to 1. Issuer types are not directly observable but can be signaled to investors. The signal is costly, but it allows investors to perfectly discern whether the issuer is Good or Bad. Assume that all issuers and investors are risk neutral and that issuers are paid their expected type minus the cost of signaling if they choose to signal. They receive the following payoffs "P" to securitization that are linear in (1) their type T (which can be Good or Bad) and (2) the cost of signaling C:

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