An individual works for an employer on a given project. If the worker chooses effort level e =1.

e 1, then with probability the project she is working on is a success (denoted s H) and the firm obtains revenue v 1. If the project is not a success (s L), the firm's revenue is zero. If the worker chooses to exert no effort, i.e. e 0, then the project fails with certainty and the firm gets no revenue. If the firm pays a wage w to the worker, the firm's expected payoff is therefore 7r(w, e) 7 ev w. The worker's income is y w + z, where w is the wage received from her employer and z is an exogenous component of income that comes from other sources. The worker's