9. shape of optimal incentives This is a continuation of problem 8 above. Now assume there are three possible outputs, x1 < x2 < x3. The probability structure is listed below, and input H is again desired.

x1 x2 x3 input H .1 .8 .1 input L .7 .2 .1 Determine an optimal pay-for-performance arrangement. Why has Ralph’s cost gone up, compared with the setting in the original problem

? Also, why is the manager now paid more for intermediate than for the most desirable (x3) output?