The owner of a firm must hire a manager to launch a new product. The new product can be successful and generate a revenue of 5000 or fail and generate a revenue of 1000. The probability of success is 0.7 (and hence the probability of failure is 0.3). If the manager exerts low effort (=e,) then the probability of success is 0.2 (and hence the probability of failure is 0.8). The manager's effort chosen by the manager, with D(e)-10 and D(e)-o. The manager's reservation utility is -40 The wage paid by the owner to the manager is the owner's only cost. The owner is risk neu If the owner could observe the manager's effort and would want the manager to exert high effort, what contract would he offer to the manager? What is the Assume from now on that the manager's effort is unobservable. Suppose that the owner still wants to ensure that the manager accepts the proposed contrac a) b) this to happen. c) a)? It can be shown that the constraints in point b) must be binding, i.e. they must hold with equality. Given this fact, compute the contract that the owner should offer to the manager. Wh

The owner of a firm must hire a manager to launch a new product. The new product can be successful and generate a revenue of 5000 or fail and generate a revenue of 1000. The probability of success is 0.7 (and hence the probability of failure is 0.3). If the manager exerts low effort (=e,) then the probability of success is 0.2 (and hence the probability of failure is 0.8). The manager's effort chosen by the manager, with D(e)-10 and D(e)-o. The manager's reservation utility is -40 The wage paid by the owner to the manager is the owner's only cost. The owner is risk neu If the owner could observe the manager's effort and would want the manager to exert high effort, what contract would he offer to the manager? What is the Assume from now on that the manager's effort is unobservable. Suppose that the owner still wants to ensure that the manager accepts the proposed contrac a) b) this to happen. c) a)? It can be shown that the constraints in point b) must be binding, i.e. they must hold with equality. Given this fact, compute the contract that the owner should offer to the manager. Wh

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.3P

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