7. short-run versus long-run incentives Return to Examples 18.1 and 18.2, but change the specification of the second period’s evaluation noise from σ22

= 10, 000 to σ22

= 15, 000.

Determine the optimal (linear) contracts for both the θ = 1 and

θ = .80 cases. Carefully explain your findings, especially with respect to the optimal piece rates and shadow prices.