2(2rRr-rD) < c < RR, and in this range kCS = rc and kreg = RrD +rD --8crr rD). The difference
kreg - kCS simplifies to
(rE - c)rD2 +(R +8c)rErD - 8crE2 =0
The relevant solution is
reD =
rr (R+8c) - √32c2+R2+16c(R+2rr )
2(c- rE)
which implies kreg > kCS only if rD > rD. □
Proof of Proposition 7: Assume that there is an excess supply of funds so that, as before,
consumer surplus is maximized by setting
rL =
R +(1 — k)c∙D
2
We can substitute this into the equation for q, recalling that cD = rD, and solve for q to
obtain q1 = 8C ^R + pR2 — 16crD (1 — k) ´ and q2 = -ɪ- (R — pR2 - 16crD (1 — k) ´. We
focus again on the Pareto dominant equilibrium with a higher level of monitoring (q1).
We proceed by maximizing CS with respect to the choice of capital, k. However,
we know from above that the combination of rL = R+(12 k)cD and the highest possible
k will be optimal for borrowers. We therefore introduce the participation constraint for
the bank, that Π = q(rL — (1 — k)cD) — krE — cq2 ≥ 0. Substituting for rL gives q =
8C (R + RR- — 16crd (1 — k) I, and we obtain
Π = cq2 — krE = c
fl
∖8c
П2
— krE = 0
Focusing on parameter values for which there is an interior solution for k, the solution is
kCS
1
2c (4ге — rD )2
R2rE + 2crD2
— 8crDrE — RqrE^R^rE'+ffcrD'—^lβrEcrD).
32
More intriguing information
1. Transgression et Contestation Dans Ie conte diderotien. Pierre Hartmann Strasbourg2. Strengthening civil society from the outside? Donor driven consultation and participation processes in Poverty Reduction Strategies (PRSP): the Bolivian case
3. The name is absent
4. Place of Work and Place of Residence: Informal Hiring Networks and Labor Market Outcomes
5. Cyclical Changes in Short-Run Earnings Mobility in Canada, 1982-1996
6. How do investors' expectations drive asset prices?
7. The name is absent
8. The InnoRegio-program: a new way to promote regional innovation networks - empirical results of the complementary research -
9. If our brains were simple, we would be too simple to understand them.
10. The name is absent