Consider the opportunistic agent encountered in the efficiency wage model. The agent is asked to provide effort at a cost c. If the agent does not provide effort, s/he will be caught shirking with probability p. If being caught shirking, the agent is fired and earns the reservation utility u. Otherwise, s/he earns the wage w. The agent maximizes his/her expected payoff minus the cost of effort.

Suppose that the cost of effort is 4, the probability of detecting a shirking agent is 4/5, and the reservation wage is 1. How high does the wage have to be to satisfy the incentive compatibility constraint?

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