8. communication and input supply incentives Return to Example 17.5. Draw the manager’s decision tree for the first two cases and verify he can do no better than accept the offered terms, supply H in the good environment, and supply L in the bad environment. Also determine his certainty equivalent in each case, at the point he has observed the information and is about to make his input choice. Why is the manager’s compensation independent of output in the bad environment in the case where public information is used?

Now draw the manager’s decision tree for the third case. Verify he can do no better than accept the offered terms, supply H and reveal the good environment if that environment is observed, and supply L and reveal the bad environment if that environment is observed.

Determine his certainty equivalent at the point he has observed the information and is about to make his input and reporting choice.

Why is the manager’s compensation at risk in the bad environment?