shape of optimal incentives This is a eontinuation of problem 8 above. Now assume there are three possible outputs, Xl < x2 < X3• The probabHity strueture is listed below, and input H is desired.

Determine an optimal pay-for-performance arrangement. Why has Ralph's eost gone up, eompared with the setting in the originaI problem? Also, why is the manager now paid more for intermediate than for the most desirable (x3) output?AppendixLO1