Business, 28.05.2020 05:01 seaotter9630

A bank can make one of two types of loans. It can loan money to local firms, and have a 75% probability of earning $500 million and a 25% probability of earning $400 million. Alternatively, it can loan money to oil speculators, and have a 25% probability of earning $2 comma 000 million and a 75% probability of losing $800 million (due to loan defaults by the speculators). Sarah, the manager of the bank, makes the lending decisions, and receives 1% of the bank's earnings. She believes that if the bank loses money, she can walk away from her job without repercussions, although she will not receive any compensation. Sarah and the bank's shareholders are risk neutral. How does Sarah invest the bank's money if all she cares about is maximizing her personal expected earnings? How would the stockholders prefer that Sarah invest the bank's money? Sarah will loan the bank's money to ▼ and stockholders will prefer Sarah loan the bank's money to ▼ local firms oil speculators .

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A bank can make one of two types of loans. It can loan money to local firms, and have a 75% probabil...

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