information content of monitor Ralph, who is risk neutraI, owns a produetion process. One of three feasible labor inputs, L < B < H, must be selected. H, in faet, is desired. Output probabilities are displayed below.
Xl x2 input H .1 .9 input B .7 .3 input L 1 0 The labor suppIier's preferences are given by -exp(-r(I-cl)}, where I denotes payment from Ralph and el is the usual personal cost term. The suppIier's outside opportunity offers a certain equivalent of M = 10,000. Assume r = .0001, CH = 5,000, es = 2,000 and eL = 1,000. Contraeting is limited to the jointly observable output.

a) Determine an optimal pay-for-performance arrangement.

b) Suppose it is possible to install a monitor. This monitor will report bad news if input L is supplied and good news otherwise. Is this monitor useful?

e) Is the monitor in [b) controllable? Is it eonditionally eontrollable? Carefully explain this ease of a serious control problem, a monitor that is both controllable and conditionaHy controHable, and yet is not useful.AppendixLO1