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Consider the following game, with a risk-neutral principal with preferences 1! = q w hiring an agent with preferences U = W 9.. The agent's
Consider the following game, with a risk-neutral principal with preferences 1! = q w hiring an agent with preferences U = W 9.. The agent's reservation utility is given by 5 = 2, and the agent can choose between an effort level of O or an effort level of 10. Output is either 0 or 400 and follows the following probability distribution, a function of effort level and some uncertain factor: Probability ((1:0) Probability (q=400l e=0 0.5 | 0.4 e=10 0.1 |0.9 a) Illustrate this game of moral hazard using a fully labeled game tree with payouts. b) Write out the agent's incentive compatibility (ICC) and participation constraints (PC)
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