Consider the following game, with a risk-neutral principal with preferences π = q - w hiring an agent with preferences U = √w-e.. The agent's reservation utility is given by Ū = 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: Probability (q=0) Probability (q=400) e=0 0.6 e=10 0.1 0.4 0.9 Interpret those constraints in words - what are they imposing on the contract being designed by the principal?

Consider the following game, with a risk-neutral principal with preferences π = q - w hiring an agent with preferences U = √w-e.. The agent's reservation utility is given by Ū = 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: Probability (q=0) Probability (q=400) e=0 0.6 e=10 0.1 0.4 0.9 Interpret those constraints in words - what are they imposing on the contract being designed by the principal?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.3P

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