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Consider the following model of moral hazard: A risk-neutral principal offers a contract to a risk-averse (uA(z) = ) agent. There are two possible

 

Consider the following model of moral hazard: A risk-neutral principal offers a contract to a risk-averse (uA(z) = ) agent. There are two possible levels of output q {qL9H}. There are two possible levels of effort e {0, 1}. The cost of effort is given by c(0) = 0 and c(1) = C > 0. The principal receives benefit 1 from output q and benefit 0 from output qz. Conditional on an effort e = {0, 1}, the probability of high output (q=gH) is e 0

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