1. There are a Firm and a Worker. Worker can be of High ability, in which case he would like to Work when he is hired, or of Low ability, in which case he would rather Shirk. Firm would want to Hire the worker that will work but not the worker that will shirk. Worker knows his ability level. Firm does not know whether the worker is of high ability or low ability. Firm believes that the worker is of high ability with probability 3/4 and low ability with probability 1/4. Most importantly, the firm knows that the worker knows his own ability level. To model this situation, we let Nature choose between High and Low, with probabilities 3/4 and 1/4, respectively. We then let the worker observe the choice of Nature, but we do not let the firm observe Nature's choice. The pay-off matrices are the following: 2 work shirk 2 Work Shirk 1 1 Hire 1,2 0,1 Hire 1.1 -1,2 Don't 0,0 0.0 Don't 0,0 0,0 Type: high type: low