Eaton-Gersovitz Model

Q4: A Sovereign Default Problem In this question, we study a variation of the Eaton-Gersovitz Model discussed in the lecture. The model setup and notations are exactly the same as those in the lecture slides, except that we assume the household repays % of the promised debt repayment in the event of a default, instead of repaying nothing. In other words, \"haircut\" rate is 50%, instead of 100%. This new assumption also means that in the event of a default, period-2 consumption is [1 HQ: %RPD. Assume throughout that l w: I; f. (2 p)H. 1. Find the relationship between promised interest rate RWD) and default probability (5'). [5] 2. We make the same assumptions as in the lecture: when there are multiple equilibria, we assume that the lender sets an interest rate so that sovereign borrowers would not default; and when the borrowers are indifferent between defaulting or repaying, theyr always repay. Derive the interest rate schedule RWD}. [15] k: L: MIN , H = 2. Solve the optimal household 1 NIH NIH 3. Use the following parameterization: p = debt level D\". [10]