information arrives after manager acts This is a continuation of problem 6 in Chapter 19 (and problem 8 in Chapter 18). The basie story and preferences remain. A high input is desired; the agent experiences an unobservable personal cost; the only contraeting variables are output and a monitor, and so on. The single difference is the probabilities are as follows:

input H input L gjx1 b/x1 gjx2 b/x2

.05 .25 .45 .25

.45 .25 .05 .25 The monitor report (g or

b) is observed after the manager aets, but hefore the output .

is observed.

a] Find an optimal pay-for-performance arrangement that will implement the H input when only the output ean be used for contraeting purposes.

b] Repeat la] for the case where the monitor is publicly observed and both the monitor and the output ean be used for eontraeting purposes.

e] Repeat [b] for the case where the manager privately observes the monitor and communieates this observation, so output and the agent's claim as to what the monitor is reporting ean be used for contracting purposes. (Hint: here you should find Igl = 7,086.02.)

d] Carefully contrast your three solutions above.

e] What happens in part [e] above if the manager' s communication is delayed until after the output is observed?

AppendixLO1