Now, assume that you have decided to start some other business and do not have the neces- sary time in your hands anymore to take care of your crops. You decide to hire someone to do the work for you. If he puts in normal effort (normalized to e=0), you will face the same risky income as before: $160,000 with good luck (probability 0.5) and $40,000 with bad luck (probabil- ity 0.5). If he works harder (e=5), the probability of good luck will increase to 0.6hence the probability of bad luck will decrease to 0.4. He is risk averse and dislikes putting extra effort. We will assume that his utility function is given by w(x, e)=xe, where x0 is the monetary payment and e{0, 5}is the effort level he chooses. You consider paying him as a function of the output you will receive: If the output is good (good luck: $160,000), you pay him wages of wG; if the output is bad (bad luck: $40,000), you pay him wages of wB. So, the timing is: you offer a contingent-contract (wG, wB); he decides to accept or reject it; he chooses the effort level; nature chooses the output level.

Assume that you cannot monitor the worker's effort levels. So, you need to make sure that given the contract that you offer him, if he accepts it, he will choose the effort level that is best for him. (h) Assume that there is a large number of potential workers who compete for your contract offer. Any given worker can make sure to earn a flat wage of $10,000 elsewhere if they cannot get a contract from you. What contract would you offer when you cannot observe effort? What will be the worker's utility and your expected profits in this situation?