Consider the following game, with a risk-neutral principal with preferences = q - w hiring an agent with preferences U = √w-e.. The agent's reservation utility is given by U = 2, and the agent can choose between an effort level of 0 or an effort level of 10. Output is either 0 or 400 and follows the following probability distribution, a function of effort level and some uncertain factor: e=0 e=10 Probability (q=0) Probability (q=400) 0.4 0.9 0.6 0.1 What would the contract look like if the principal tried to push the wages when q=0 to zero? Would the principal want to do this? Explain.

Consider the following game, with a risk-neutral principal with preferences = q - w hiring an agent with preferences U = √w-e.. The agent's reservation utility is given by U = 2, and the agent can choose between an effort level of 0 or an effort level of 10. Output is either 0 or 400 and follows the following probability distribution, a function of effort level and some uncertain factor: e=0 e=10 Probability (q=0) Probability (q=400) 0.4 0.9 0.6 0.1 What would the contract look like if the principal tried to push the wages when q=0 to zero? Would the principal want to do this? Explain.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.3P

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