root utility This is a continuation of problem 15 in Chapter 18, where the manager's utility function is given by U(z,a) = vz -V(a). You should review the original problem to refresh the details. Further suppase the a = H act is no longer available; so the question revolves around a = B and a = L.

A monitor can also be used. This monitor will report good (g) or bad

(b) news at the end of the game. The probabilities are: p(gIB) = p(blL) = .75, regardless of what output is produced. The monitor calls it correct with probability .75.

a] Find an optimal contract that will induce the agent to supply a = B.

b] Carefully contrast your answer in the earlier problem, where the monitor was not available and the pay-for-performance arrangement paid the agent 2,025 for low output and 9,025 for high output.

c] Why does the optimal solution not use the monitor's report when high output is observed?

AppendixLO1