Now, suppose there is perfect competition among banks in both periods. What would the repayment rate R(1)c be that the bank would charge in the first period? What would the repayment rates Rs(2)c, RE(2 be in the second period paid by successful and unsuccessful borrowers? How does competition affect overall risk taking in this model and why? Explain your finding carefully.
Financial Economics A bank faces a pool of borrowers with measure one in two successive periods. In each period, each borrower wishes to borrow 1 unit from the bank. In each period, a low risk borrower’s project returns G = 2 with probability pg = 0.9 and 0 otherwise, while a high risk borrower’s project […]