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Moral HazardSuppose a bank has an opportunity to invest in a risky project. If the project is ...

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Moral HazardSuppose a bank has an opportunity to invest in a risky project. If the project is ...

Moral Hazard

Suppose a bank has an opportunity to invest in a risky project. If the project is successful, the bank will earn $7,000; if it is unsuccessful, the bank will lose $14,000. If the project has a 95 percent chance of being successful and the bank is risk-neutral, will the bank make the investment?

Now suppose the government establishes a policy that helps banks that are suffering losses. Under this policy the government will give the bank 50 percent of its losses if the project is unsuccessful. If the bank is risk-neutral, will the bank make the investment?

▸ yes, yes

▸ no, no

▸ no, yes

▸ yes, no

Textbook

Macroeconomics

Edition: 3^rd

Authors: Acemoglu, Laibson, List

Read 59 times

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