Effect of Observability on the Form of an Employment Contract Fred Principal of Swissvale Investments is considering an investment in a farming venture in the country of Markovia.

The plan is to grow and harvest Gronk, a revolutionary natural food highly prized by distance runners for its sustenance attributes. The climatic conditions and soil of southwestern Markovia are unique and are the only known conditions under which Gronk can be produced.

Gronk-growing technology is well understood. Gronk production depends on weather conditions and the effort of the farmer in the growing season and hence is subject to uncertainty.

Markovia is a new and remote country that is virtually inaccessible to outsiders. Although Markovia has a well-established legal system, commercial development is backward.

Moral Hazard, a Markovian farmer and promoter, has invited Fred and other investors to invest in Gronk farming. Moral would farm the Gronk, sell the product, and distribute the proceeds to investors.

Fred, and all other potential investors, are risk-neutral. Moral is risk-averse.

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Required (1) If no other information is available, what is Fred's best course of action regarding this opportunity? (2) Suppose Fred discovers that Markovia has a well-established and reputable public ac- counting profession. How, if at all, would this information affect your response to Re- quirement 1? (3) What further information, if any, might Fred seek beyond the information that a public accountant might supply?