communication and input suppIy incentives Retum to the example in Table 21.1. For the first two cases in Table 21.2, draw the manager's decision tree. Then verify that the manager can do no better than accept the offered tenns, supply H in the good environment, and supply L in the bad environment. Why is the manager' s eompensation 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 ease. Verify the manager 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. Why is the manager' s compensation at risk in the bad environment?

AppendixLO1