You have been hired to help start up a new, innovative, legal partnership in the City of London. The head partner wants to design the compensation packages for his employees to ensure that the associates employed by the firm work hard. There is an effort cost of 10 in this firm, incurred by each associate who works hard. The firm consists of a group of partners and a group of new associates. We start by focusing on the wage levels and trajectory of the new associates: To simplify, we will assume that there are only two employment periods. You want to design a two-period contract that specifies the fixed wage that you will pay the new associates in the first stage of their employment and then the fixed salary they can expect to receive if they are promoted to partner at the end of that first stage. Partners do not exert effort. The two salary levels are denoted (Wt,Wt+1). The outside alternative payoff (wage less effort cost) for the type of lawyers you want to hire is Vt in the first stage of their career and Vt+1 in the second stage (irrespective of where they work in the first period). If an associate works hard in this new firm, she will be promoted to partner at the end of the first period. If she does not work hard, there is some probability that she will be lucky and still get promoted but, with probability p, the partners will realize she is a lazy lawyer a) First, assume the lawyer has signed the contract, how much does her expected wage as partner have to be in order to induce her to exert effort in her first period as an associate? b) In order for a new lawyer to sign the employment contract as an associate in this firm, what condition must hold for her career payoffs? That is, find her individual rationality constraint, which, if satisfied, means he will join the firm. (Note: the lawyer will not exert costly effort if she is promoted to partner, only receive the payment Wt+1 that you found in part (a)). c) Having discussed extensively with the partners, you are convinced that the outside options of the new lawyers they want to hire are constant over time (soVt+1=Vt). Write down the wage contract for a new associate in the firm. Be sure to specify Wt and Wt+1 and the promotion rule. d) Having successfully implemented this compensation structure in the new law firm, you are contacted by a second new law firm. The expected outside options of lawyers in each stage of their careers are the same as in part (c), but this firm is in a slightly different area of law. In this area, partners work much more closely with associates than in the first firm. This means that if an associate is not working hard, it is much easier for the partners to be able to tell. And, if the associate is being lazy, the partners will fire him, so p is much higher in this firm. How does this difference in the nature in the work across the two firms affect the optimal wage trajectory of lawyers in each firm? Which associates see a larger raise when they are promoted? Which associates have a higher entry-level salary? e) In this second new law firm, the partners also need to hire some specialized lawyers who have expertise in offshore tax law. These lawyers have the same outside option as the regular new lawyers, of Vt, in the first stage of their careers, but can earn enormous salaries in the Cayman Islands in the second stage of their careers (independent of where they work in the first stage). Does this affect how much these lawyers need to be paid as associates in order to ensure that the tax specialists work hard in this stage? You have been hired to help start up a new, innovative, legal partnership in the City of London. The head partner wants to design the compensation packages for his employees to ensure that the associates employed by the firm work hard. There is an effort cost of 10 in this firm, incurred by each associate who works hard. The firm consists of a group of partners and a group of new associates. We start by focusing on the wage levels and trajectory of the new associates: To simplify, we will assume that there are only two employment periods. You want to design a two-period contract that specifies the fixed wage that you will pay the new associates in the first stage of their employment and then the fixed salary they can expect to receive if they are promoted to partner at the end of that first stage. Partners do not exert effort. The two salary levels are denoted (Wt,Wt+1). The outside alternative payoff (wage less effort cost) for the type of lawyers you want to hire is Vt in the first stage of their career and Vt+1 in the second stage (irrespective of where they work in the first period). If an associate works hard in this new firm, she will be promoted to partner at the end of the first period. If she does not work hard, there is some probability that she will be lucky and still get promoted but, with probability p, the partners will realize she is a lazy lawyer a) First, assume the lawyer has signed the contract, how much does her expected wage as partner have to be in order to induce her to exert effort in her first period as an associate? b) In order for a new lawyer to sign the employment contract as an associate in this firm, what condition must hold for her career payoffs? That is, find her individual rationality constraint, which, if satisfied, means he will join the firm. (Note: the lawyer will not exert costly effort if she is promoted to partner, only receive the payment Wt+1 that you found in part (a)). c) Having discussed extensively with the partners, you are convinced that the outside options of the new lawyers they want to hire are constant over time (soVt+1=Vt). Write down the wage contract for a new associate in the firm. Be sure to specify Wt and Wt+1 and the promotion rule. d) Having successfully implemented this compensation structure in the new law firm, you are contacted by a second new law firm. The expected outside options of lawyers in each stage of their careers are the same as in part (c), but this firm is in a slightly different area of law. In this area, partners work much more closely with associates than in the first firm. This means that if an associate is not working hard, it is much easier for the partners to be able to tell. And, if the associate is being lazy, the partners will fire him, so p is much higher in this firm. How does this difference in the nature in the work across the two firms affect the optimal wage trajectory of lawyers in each firm? Which associates see a larger raise when they are promoted? Which associates have a higher entry-level salary? e) In this second new law firm, the partners also need to hire some specialized lawyers who have expertise in offshore tax law. These lawyers have the same outside option as the regular new lawyers, of Vt, in the first stage of their careers, but can earn enormous salaries in the Cayman Islands in the second stage of their careers (independent of where they work in the first stage). Does this affect how much these lawyers need to be paid as associates in order to ensure that the tax specialists work hard in this stage