We preserve all the previous assumptions about the idiosyncratic shock, ц, assuming a modified production function, where projects are also subject to macro shocks
each state may occur with probability 0.5.9 i_et us denote by x) the repayment on project type x, the risk of which is 11. We assume that the realized output is public information. If the contractual repayment exceeds the realized output, the bank gets all output.” Hence,

Unlike our pervious analysis, with macro shocks some producers would default partially, implying that the realized bank repayment will differ across producers. In the appendix we show that the equilibrium is characterized by
where E is the expectation operator. Condition (20a) states that banks break even ex-ante. Recall that the projects’ productivity index is unobservable ex-ante, hence the banks’ expected revenue is obtained by averaging it across all projects. Condition (20b) is the optimal risk monitoring, and condition (20c) is the brake even condition for the marginal entrepreneur. The presence of the macro shock does not modify the expected output, and the social welfare function continues to be (15). Consequently, result (17) regarding the ambiguous welfare effects of a drop in the banks’ cost of funds continues to hold. In the Appendix we show that, for constant elasticity, the uniform distribution example considered before, an extended version of claim 3 holds. guaranteed payday loans direct lenders