- - _ _ - Table 1: Please ll in this table with your calculations. E(wage) means the expected value of the wage, Var(wage) means the variance of the wage. 4. Find the second-best level of effort e\" and the optimal values for a, b. Show that the second-best effort is lower than the rst-best effort. Moreover, show that at the optimum b 0. The term A is the coefficient of risk aversion. Note: This setting is very similar to "Moral Hazard Model I" on the slides: the only thing that I've changed is the cost function. 1. Assuming that effort is verifiable, compute the first-best level of effort. Under what conditions on parameters is e* = 0 optimal? From now onwards, always assume that parameters are such that e* > 0. 2. We have seen in class that the first-best contract specifies the following: the manager must exert a level of effort equal to e* and is compensated with a fixed wage w*. Compute w*. What are the owner's expected profits in the first-best? 3. Assume now that effort is not verifiable. The owner offers a wage that is linear in gross profits, w( = ) = atb(etc ) . Write down the owner's maximization problem in the second-best, spec- ifying (i) the owner's objective function, (ii) the agent's incentive con- straint and (ini) the agent participation constraint