3. The contracting story developed here results in a cost to the firm of input H that we denoted C(H). Without any contracting frictions, the manager would be paid the sum of reservation price plus personal cost, or M + cH. It also turns out the quantity C(H) − (M + cH)

is equal to the manager’s risk premium for the compensation risk presuming input H is supplied. Carefully explain why this linkage between incremental cost to the firm and risk premium to the manager arises in the contracting model.