Consider the following variant on the two-effort moral hazard problem. The risk-neutral principal and the strictly risk-averse agent can sign a contract that species the agent's payment as a function of the output 2:, and this contract is signed before the agent takes her action. But now assume that after the agent takes the action and before a: is realized, the principal can make a takeitorleaveit renegotiation offer to the agent. That is, she can offer to replace the contract with another one, which also specifies the agent's payment as a function of x. The agent can accept or reject the new offer. If the agent rejects, the original contract is in place. If she accepts, the new contract applies. (a) Suppose the principal can observe the agent's action before she offers the new contract. Show that in this case the high level of effort can be implemented in the first-best way. Why doesn't renegotiation destroy the force of the original contract? (b) Suppose now that the principal can't observe the agent's action. Restricting attention to pure strategies, prove that only the low level of effort can be implemented