### No More Worries!

Our orders are delivered strictly on time without delay

### Paper Formatting

• Double or single-spaced
• 1-inch margin
• 12 Font Arial or Times New Roman
• 300 words per page

### No Lateness!

Our orders are delivered strictly on time without delay

### Our Guarantees

• Free Unlimited revisions
• Guaranteed Privacy
• Money Return guarantee
• Plagiarism Free Writing

# Financial fraud

Consider a situation with financial fraud and whether and how auditing can help solve the problem, and a proposed model of Adverse Selection and Signaling. Consider the interaction between an investor (I) and a firm (F). An investor decides whether she wants to invest \$100 with the firm or not. The firm may be a high return investment (H) or a low return investment (L). If the firm is H, the investor’s wealth will increase to \$120 and the firm makes \$50 in profits. If the firm is L, the investor’s wealth falls to \$50 and the firm makes \$50 in profits. The prior probability that the firm is of H type is 𝑝. The firm knows if it makes a high return or a low return. Based on this information it approaches the investor for an investment. The extensive form game is shown below.

There are follow possible strategies that the firm can choose:
Separating Strategies – BN and NB where the first action in the strategy corresponds to the high type firm and the second action corresponds to the low type firm.
Pooling Strategies – BB, NN.
a) Check if each of the 4 strategies can be part of a Perfect Bayesian Equilibrium by going through the following steps:
• Given the strategy, what is the investor’s belief that the borrowing firm is of type H:
𝑞 = 𝑃𝑟[𝐻|𝐵𝑁]=
• Given the belief 𝑞, what is the investor’s best response. Should the investor invest or not?
• Given the investor’s decision, is the firm’s strategy that is being considered a best response?
b) Under what conditions does the investment occur? Look at the pooling equilibrium BB and determine the threshold value of 𝑝 that would make investing a best response for the investor.

Sample Solution

### 12% Discount

• Research Paper Writing
• Essay Writing
• Dissertation Writing
• Thesis Writing

### Why Choose Us

• Money Return guarantee
• Guaranteed Privacy
• Written by Professionals
• Paper Written from Scratch
• Timely Deliveries
• Free Amendments