A foreign company approaches you with a certain project. The success of this project depends only on your effort e. If you seriously work on this project (working all day!), the probability of success is pH and the project return is yH, but otherwise pL and yL(0 < pL < pH < 1 and yB < yG). Since pH and yG are large, the company wants you to work hard. Your utility function is u(w, e) =w e, where w is a wage contract with this company. e > 0 when you work hard, otherwise e = 0. Your current job (in the government or in the central bank) gives you the utility u0.

i. Suppose your efforts are observable (and verifiable) for the company. Then what kind of wage contract (wG ,wB ) does the company offer you when it maximizes its expected profit subject to the constraint where the wage contract is attractive enough for you to leave the current job.

ii. If your efforts are not observable, what wage contract (wG ,wB ) does the company offer to you?