Question
Question 2: (25 points.) Suppose a firm runs a tournament compensation scheme for two workers where each worker gets base pay a and the worker
Question 2: (25 points.) Suppose a firm runs a tournament compensation scheme for two workers where each worker gets base pay a and the worker who produces more output gets a prize S. Output for each worker i is Qi=d Ei+i Suppose 2 1= is uniformly distributed with mean zero and takes a range of values given by R=2. The workers both have outside options of U alt = 30 and utility functions Ui = Yi - E2 /2. If d=10, what are the profit-maximizing levels of a and S for the firm? Will the firm choose to offer this compensation scheme to the two workers and produce?
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