Section 5: Moral hazard and contracts

The company Au miel dor manufactures various honey-based products: creams, candles, soaps, etc. The company wants to expand its territory and plans to hire a representative.

The business owner knows that some reps can put a lot of time and effort into their work and others can't. A representative who makes little effort will meet few potential customers and the chances of expanding the territory will be very low. He knows that the workers estimate that the effort results in a loss of utility equivalent to $5,000. Finally, he also knows that any representative, excellent or not, can be unlucky. He estimates at 50% the chances that his representative will be unlucky.

The following table presents the sales that it is possible to obtain according to the different situations.