qualitative shape of optimal incentives Consider a costly input setting in whieh output (x) ean take one offour possible values. Input ean be either Lor H, with H desired by the risk neutral organizer. The input suppHer is risk averse, and ineurs an unobservable personal cost associated with input supply. We use the preference strueture in problem 8 above, with r =

.0001, CH = 5,000 and eL = O. Let the supplier's next best opportunity offer a wealth of M = 7,000. The output probabiHties are given below.

input H input L Let Ij denote the payment to the input supplier when output xj is observed. Without solving for an optimal arrangement, rank the four payments from lowest to highest.

Carefully explain your answer.

AppendixLO1