Consider a model with competitive and risk-neutral principals and a risk-neutral agent. The agent may be of two possible types (abilities)

Compute the posterior belief held by the market on the agent’s ability after the first period has been observed. Compute the fixed wage t2 offered to him in the labor market. By comparing the expected payoff when the agent puts forth effort and when he does not put in effort, state whether it pays to put in effort. If the agent lives for one period only, will he put forth any effort?

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0 = {1; 0.5} with respective probability v=and 1 - v=1. There are two periods t = 1 and t = 2 and no discounting. The agent's output q in each period may take two possible values, zero and ten, with respec- tive probabilities (1 - ); where = 1 if he exerts effort and = 0.6 otherwise (effort is unobservable). The cost of effort for the agent is e = 1. We assume that there is perfect competition between alterna- tive principals in order to attract the agent in period 2. Also, neither the agent nor the principals are informed of the ability of the manager. In addition, the principal cannot write contracts conditional on the production level (the production level is observed but not verifiable). The first-period wage is a fixed wage t, while the second-period wage may depend on past observation t(q). The timing of the model is as follows: