You wish to hire Ron to manage your Dallas operations. The profits from the operations depend partially on how hard Ron works, as follows.
Profit Probabilities | ||
Profit = $10,000 | Profit = $50,000 | |
Lazy | 60% | 40% |
Hard worker | 20% | 80% |
If Ron is lazy, he will surf the Internet all day, and he views this as a zero-cost opportunity. However, Ron views working hard as a “personal cost” valued at $1,000. What fixed percentage of the profits should you offer Ron? Assume Ron cares only about his expected payment less any “personal cost”.
Concept Introduction:
The principal−agent problem is the differences of interest and moral hazard matters that occurs when one person (the "agent") is able to make decisions and/or take actions on behalf of, or that impact, another person (the "principal").
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