Question
employee farms and applies effort, employes's outside option is 0 , andemployee has wealth w Thecompany cannot observee Effort is costly. The cost of effort
employee farms and applies effort,
employes's outside option is 0 , andemployee has wealth w
Thecompany cannot observee
Effort is costly. The cost of effort is 1/2ce^2
Two things can happen:
With probability : Output is H
With probability : Output is 1-e output is zero
company to employee
Payment of h if output is H
Payment of l if output is 0
max, P(e)= eH+(1e)0 1/2c.e^2
such that
question:
company A optimal e ( can call this Ec)
answer:
H/c = Ec
question:
set up employee utility maximization problem and find his chosen level of effort. Call thisand express it as a function ofh l c
answer:
(h-l)/c= et
question:
max h,L[eH+(1e)0(eh+(1e)L)]
such that
e argmaxeh+(1e)L1/2ce^2 ,
(eh+(1e)L1/2ce^2>=0)
question:
Solve for h andL in terms of H and c . To do so, plug your answers to Q3 and Q4 into the two constraints inQ5 and solve.
P(e) = e*h + (1-e)*L (employee maximises his pay off)
Q4 answer H = h-L
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