017 QP SIM (2).pdf age 5 of 6 v O' Q Search 2017 QP SIM (2).pdf vallpapers Research 12. A risk neutral principal hires a risk averse agent to work on a project. The agent's utility function is SEC TECH V(w, ei) = Vw - g(ei), where w is wage, g(ei) is the disutility associated with the effort level e; exerted on the project titled folder 2 3 The agent can choose one of two possible effort levels, eH or en, with associated disutility levels g(eH) = 2, and g(el) = 1. If the agent chooses effort level eH, the project yields 20 with probability 3/4, and 0 with probability 1/4. If he chooses el, the project yields 20 with probability 1/4 and 0 with probability 3/4. The reservation utility of the agent is 0. (a) If effort is observable, which effort level should the principal implement? What is the best wage contract that implements this effort? [10 marks] (b) Suppose effort is not observable. What is the optimal contract that the principal should offer the agent? What effort level does this contract im- plement? [10 marks]