Suppose Samsung and Vizio can collaborate on the production of LED TV's. Samsung produces all the parts and Vizio assembles. If both firms exert optimal effort, the probability is 0.25 that they will generate a revenue of $600 million, which they will split equally. A sub-optimal level of effort from one firm reduces the probability of achieving a revenue of $600 million to 0.15, whereas if both firms shirk, the probably is reduced to only 0.10. Assume that optimal effort costs $35 million, whereas shirking costs $0.

If monetary amounts represent payoffs, Analyze the Nash Equilibrium, solve the incentive problem and discuss it's Pareto efficiency, assuming they can buy a novel form of incentive: an anti-insurance service.

The anti-insurance contract works as follows: The AI firm matches revenue dollar for dollar up to $600 million. Thus, for example, if the firms achieve joint revenue of $600 million, the AI firm will add $600 million to the total, so that each firm receives $600 million. In exchange for anti-insurance contract, firms A and B each pay the AI firm $90 million in advance.