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Principal agent problem with moral hazard 17. Consider the following principal agent problem with moral hazard (effort is not contractible). The firm's prots are given

Principal agent problem with moral hazard

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17. Consider the following principal agent problem with moral hazard (effort is not contractible). The firm's prots are given by: 77 = 6+ 2, where e is the manager's effort and z is a random variable with 13(2) 2 0, Va'r(z) = 02. Assume that the contract is given by the linear payment scheme: w = a + bx, where a, is a xed salary and b is the share of prots. The agents's cost of supplying effort is c = .582, so his net income is y = w (3. Let his utility, or, be given by the linear mean variance utility function, u = E(y) .5R Varfy), where R > 0 is a parameter (capturing risk aversion). Find the solution to this principal agent problem (the optimal values of (1,1) and e)

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