Consider two financial institutions. Each institution employs two loan officers (henceforth: agents), and both institutions have the same objectives: financial self-sustainability and poverty alleviation.

Assume that the agents are identical and risk-neutral and that they work eight hours per day. Each working hour costs four rupees. Institution A applies a balanced incentive scheme: Agents are rewarded for meeting both objectives. Suppose the agents’ evaluations take the following form:

Institution B, on the other hand, applies a different incentive scheme:
One agent will specialize in obtaining financial self-sustainability, and the other in alleviating poverty:

The production function (also the utility function for the two institutions)
is q = x2 + y2 where x and y are, respectively, the time spent on financially oriented activities and in poverty alleviation. Show that this production function indicates that specialization will make the agent more effective. Draw the function. Compute the optimal choice for the agent in institutions A and B, and compute the maximum utility for each institution.

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Evaluation Bad Good Excellent Working time division by the manager If the agent spent less than two hours working for at least one of the two objectives If the agent spent 3-3.5 hours working for both objectives If the agent spent four or more hours working for both objectives Salary/day (rupees) 20 Rs (the minimum level of salary) 60 Rs 100 Rs