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Consider a bank that receives a $1 deposit at t = 0 from each of 250 different depositors.It invests $50 in shareholders' equity in the bank and lends $280, keeping $20 as cash reserves.Out of the 250 depositors, there are 100 active depositors type A) who are capable of monitoring the bank's management; the remaining are passive type P who keep their money for transaction and safekeeping purposes.It costs $0.04 per period for a type A depositor to monitor the bank.The bank has two mutually exclusive projects or loans.Loan R pays $500 with probability 0.7 and zero with probability 0.3 at t = 1.Loan S pays $450 with probability 0.8 and $350 with probability 0.2 at t = 1.If the bank chooses one of these two loans, the probability that the bank will actually end up with that loan is 0.8.With probability 0.2, the bank will have inadvertently chosen the other loan.Monitoring allows the type A depositors to discover the bank's true project choice between t = 0 and t = 1, say at t = 1/2.If so desire, these depositors can force liquidation of the bank at t = 1/2 by withdrawing their deposits.Premature liquidation of the loans at t = 1/2 will yield $88.Under the terms of the deposit contract, the bank promises to pay a 10% interest conditional on the bank having the capacity to do so) if withdrawal occurs at t = 1, and no interest if withdrawal occurs before t = 1.The riskless discount rate is zero and all agents are risk-neutral.Although all type P depositors plan to withdraw at t = 1, each is subject to a random liquidity shock that may motivate them to withdraw at t = 1/2.The fraction of those type P depositors who want to withdraw is known in advance to be 25/150.Bank managers act in the best of the shareholders.
-Suppose you are a type A depositor.You don't monitor and behave like a liquidity- motivated type P depositor.If the other type A depositors don't withdraw, your expected payoff is

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Consider a bank that receives a $1 deposit at t = 0 from each of 250 different depositors.It invests $50 in shareholders' equity in the bank and lends $280, keeping $20 as cash reserves.Out of the 250 depositors, there are 100 active depositors type A) who are capable of monitoring the bank's management; the remaining are passive type P who keep their money for transaction and safekeeping purposes.It costs $0.04 per period for a type A depositor to monitor the bank.The bank has two mutually exclusive projects or loans.Loan R pays $500 with probability 0.7 and zero with probability 0.3 at t = 1.Loan S pays $450 with probability 0.8 and $350 with probability 0.2 at t = 1.If the bank chooses one of these two loans, the probability that the bank will actually end up with that loan is 0.8.With probability 0.2, the bank will have inadvertently chosen the other loan.Monitoring allows the type A depositors to discover the bank's true project choice between t = 0 and t = 1, say at t = 1/2.If so desire, these depositors can force liquidation of the bank at t = 1/2 by withdrawing their deposits.Premature liquidation of the loans at t = 1/2 will yield $88.Under the terms of the deposit contract, the bank promises to pay a 10% interest conditional on the bank having the capacity to do so) if withdrawal occurs at t = 1, and no interest if withdrawal occurs before t = 1.The riskless discount rate is zero and all agents are risk-neutral.Although all type P depositors plan to withdraw at t = 1, each is subject to a random liquidity shock that may motivate them to withdraw at t = 1/2.The fraction of those type P depositors who want to withdraw is known in advance to be 25/150.Bank managers act in the best of the shareholders.
-Suppose you are a type A depositor.You don't monitor and behave like a liquidity- motivated type P depositor.If the other type A depositors don't withdraw, your expected payoff is

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Consider a bank that receives a $1 deposit at t = 0 from each of 250 different depositors.It invests $50 in shareholders' equity in the bank and lends $280, keeping $20 as cash reserves.Out of the 250 depositors, there are 100 active depositors type A) who are capable of monitoring the bank's management; the remaining are passive type P who keep their money for transaction and safekeeping purposes.It costs $0.04 per period for a type A depositor to monitor the bank.The bank has two mutually exclusive projects or loans.Loan R pays $500 with probability 0.7 and zero with probability 0.3 at t = 1.Loan S pays $450 with probability 0.8 and $350 with probability 0.2 at t = 1.If the bank chooses one of these two loans, the probability that the bank will actually end up with that loan is 0.8.With probability 0.2, the bank will have inadvertently chosen the other loan.Monitoring allows the type A depositors to discover the bank's true project choice between t = 0 and t = 1, say at t = 1/2.If so desire, these depositors can force liquidation of the bank at t = 1/2 by withdrawing their deposits.Premature liquidation of the loans at t = 1/2 will yield $88.Under the terms of the deposit contract, the bank promises to pay a 10% interest conditional on the bank having the capacity to do so) if withdrawal occurs at t = 1, and no interest if withdrawal occurs before t = 1.The riskless discount rate is zero and all agents are risk-neutral.Although all type P depositors plan to withdraw at t = 1, each is subject to a random liquidity shock that may motivate them to withdraw at t = 1/2.The fraction of those type P depositors who want to withdraw is known in advance to be 25/150.Bank managers act in the best of the shareholders.
-Suppose you are a type A depositor.You don't monitor and behave like a liquidity- motivated type P depositor.If the other type A depositors don't withdraw, your expected payoff is

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