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Round your final answers (but not your working) to two digits after the decimal place. Consider a principal-agent problem in which the principal contracts with
Round your final answers (but not your working) to two digits after the decimal place. Consider a principal-agent problem in which the principal contracts with the agent over revenue (). The agent's effort, , (stochastically) determines output. Assume that the uncertainty means there are 3 possible states of nature (S1, S2, S3) each of which can occur with probability 1/3. The agent can choose between two levels of effort. The relationship between effort, the states of nature and revenue are given by the following table. Revenue States of nature S1 S92 S3 Effort = 60000 6000030000 4 30000 6000030000 Assume the principal is risk neutral with profit function B(;r, w) 1 1 and the agent is risk averse with utility function [( w, e ) = Juw 2 where 1 is the wage the agent receives. The outside option for the agent yields utility of i = 114. What is the expected profit from the profit maximising contract which implements an effort of = (j (given effort unobservable)
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