Proportional Sanctions
In the model with direct sanctions of Section 13.3.3, replace the assumption of a constant sanction \(k\) with the assumption of a proportional sanction \(k(\epsilon)\equiv \alpha(\bar{y}+\epsilon)\). Characterize the optimal debt contract. How does it compare with the case of constant sanctions?
No solution has been posted yet. If you have a solution, we invite you to share it in the comment box at the bottom of this page.
---
title: "Exercise 13.4"
subtitle: "Proportional Sanctions"
---
<a class="return-button" href="index.qmd">⬅ Return</a>
## Problem
In the model with direct sanctions of Section 13.3.3, replace the assumption of a constant sanction $k$ with the assumption of a proportional sanction $k(\epsilon)\equiv \alpha(\bar{y}+\epsilon)$. Characterize the optimal debt contract. How does it compare with the case of constant sanctions?
## Answer
_No solution has been posted yet. If you have a solution, we invite you to share it in the comment box at the bottom of this page._