Question
Suppose you are told that it is an empirical fact that firms with high performance have managers that stand on their heads for a longer
Suppose you are told that it is an empirical fact that firms with high performance have managers that stand on their heads for a longer period of time than rms with poor performance. Construct a signaling equilibrium along the following lines that will yield such a prediction. Consider a manager with quality q chosen from the interval [0; q]. Quality is a measure of the manager's ability to manage well and is known only by the manager herself. The manager's utility depends on her compensation w(t) = E[qjt] (here we have assumed that the manager's wage is equal to her expected quality conditional on her \signal" t) and on the amount of time she spends standing on her head t. Choose a speci cation for managerial utility (make it as simple as possible) that yields a signaling equilibrium where a higher quality manager signals her type by standing on her head for a longer period of time. Identify what it is about your speci cation that yields the desired results.
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