Problem
Consider an economy similar to the one in but with the exception that in this one each borrower has wealth equal to w that can be used as collateral. In other words, if a borrower defaults on her debt obligations the bank can seize w. Define the gross repayment R* that would enable the bank to elicit effort and debt repayments from the borrower at date 1. In what way does this result differ from the one obtained in Explain your answer.