Question

Font Paragraph Styles 45-w, 2-5 High Effort Accept Offer w Low Effort 25-w, 2w-4 Reject .0.0 Don't Offer 0,0 Figure 2: A principal agent problem. What will the agent do in Figure 2. If the principal offers a fixed-wage of w = 25. Given that the principal (P) must offer the agent ( a fixed wage contract at wage w. or offer no contract at all? The principal should offer a wage (w) above what to maximize his own payoff? From the principal's perspective, what is the best wage offer at low and high effort suppose the principal (P) offer the agent (A) a contract with the wage conditional on the agent's effort. to search

Answer 1

when w=25, then Ğ ame Tree Don't offer (0,6 Reject / S Accept cole Low & High . (0,46) (20,45) 80 Solving Game backwards ! Dont offer (010) (0, 46) Agent will accept the offer & will (U so put Low effort Level And Now as Qw - 4 > Qw-5, 8o Agent will always go for low Afoot, Of a single w is offerred, 80 Donit offer too) Reject Accept (016) (256, 2w4) 80 To max own pay off aw - 470 - w72 Thus offer a wage above a, so that Agent Accept offer & p then gets tue payoff An.

ciul now two different wage Levels, then for low effort, 20-470 W22, low wages should be above $8 for High effort, 2w-5 zo W) 2. 58 WH should above 2.59 An