Agency Theory Considerations in Choosing a Wage Conestogo Farms produces ginseng. The farm is owned by an absentee landlord who hires a manager to grow and harvest the crop. The market wage for hired help is $40,000 per season.

The ginseng output is determined by two factors: the weather, which is a random factor that cannot be controlled, and the manager's care level, which can be high or low.

The manager suffers a personal cost of $10,000 for putting in a low level of care and

$25,000 for putting in a high level of care. The landlord can observe neither the weather conditions nor the manager's care level. Only the crop outcome can be observed. There are two possible crop outcomes: good or bad. The following table shows the probability of good and bad outcomes, for high and low care levels.

The landlord has decided that she would like to motivate the manager to provide a high level of care. The manager has a utility for wealth that can be modeled as negative exponential with a risk parameter equal to -0.0001.
Required How should the landlord pay the manager to ensure that the manager provides a high level of care?

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Probability of good crop outcome Probability of bad crop outcome CARE LEVEL HIGH CARE LEVEL LOW 0.85 0.25 0.15 0.75