Consider the principal-agent problem discussed in lecture

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1. Consider the principal-agent problem discussed in lecture, with the constraint that s greaterthanorequalto 0. At what level of u does the optimal contract result in agent effort being set to its first-best level?

2. For low values of u we said that the agent earns a "rent" (strictly greater utility from the optimal contract than his outside option). As we increase u starting from u = 0. at what value of u does the agent stop earning a rent? How does the overall efficiency of the relationship depend on u? You may answer algebraically or with carefully drawn graphs in (b, s) space.

Reference no: EM131424600

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