The Significance of Income Hierarchy in a Simplified Credit Model
In a simplified economic model of a credit market, there is one lender and three borrowers. Each borrower undertakes a project that yields a total value of 1. The lender provides the capital and, in return, receives a share 's' from each of the three projects. Consequently, the lender's total income is 3s, and each borrower's income is (1-s). A foundational assumption for this model to be coherent is that the lender must be the highest-earning individual. Analyze the implications for the model's validity and interpretation if this foundational assumption is violated (i.e., if 3s < 1-s).
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Ch.9 Lenders and borrowers and differences in wealth - The Economy 2.0 Microeconomics @ CORE Econ
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