Assume that in the market there exist two types of workers where the principle cannot distinguish types. The two types only differ with respect to the disutility of effort. The disutility is either e^2 or 2e^2.

The utility function for worker one is

U^1(w,e) = w - e^2

and for worker two

U^2(w,e) = w - 2e^2

both types of workers have reservation utility zero

The probability that the worker is of type 1 is q = 1/2

An interested firm is risk neutral and has profits Π (w,e) = e - w

a) Which is the good high productive worker and which is the low productive worker

b) Derive the optimal contract for the firm if it had perfect info about the workers type. What effort levels are demanded and what wages paid. Calculate the firm's profits of both types were employed

c) Formulate the problem when an adverse problem is present

d) Derive the second best contract and calculate the firm's profits

e) Compare the cases of symmetric and assymetric info

Posted Date: 2/25/2013 2:05:26 AM | Location : United States

Ask an Expert

Related Discussions:- Derive the optimal contract, Assignment Help, Ask Question on Derive the optimal contract, Get Answer, Expert's Help, Derive the optimal contract Discussions

Write discussion on Derive the optimal contract
Your posts are moderated

Write your message here..

Related Questions

Primary inputs, Normal 0 false false false EN-IN X-NO... Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

Perfect competition, The price at which output is sold in a perfectly compe... The price at which output is sold in a perfectly competitive market is determined by

Money in an economic system, Money facilitates market activities and is ess... Money facilitates market activities and is essential in complex market systems.  With money people can avoid the problems  associated with coincidence of wants.  Between, these pro

Explain labour intensity, Q. Explain Labour Intensity? Labour Intensity... Q. Explain Labour Intensity? Labour Intensity: Ratio of labour effort expended, compared to total on-the-job compensated labour time. A higher ratio of labour intensity reflect

Write down the classical linear regression model, Question: (a) Write ... Question: (a) Write down the Classical Linear Regression Model (CLRM) and explain its assumptions in detail. (b) The following data relating to information collected on

What are the possible advantages of free trade, What are the possible advan... What are the possible advantages of free trade? Firms a)  Specialisation and enhanced use of comparative advantage b)  Possibility of advantages of scale c)  Spread

Cost-of-living indexes, COST-OF-LIVING INDEXES   * The CPI is computed e... COST-OF-LIVING INDEXES   * The CPI is computed each year as the ratio of cost of a typical group of consumer goods and services today in comparison to the cost during a base per

1, a) Consider the following flows (in thousand of people) between the vari... a) Consider the following flows (in thousand of people) between the various labour market states in a particular month: UE = 240 000; UNLF = 180 000; EU = 190 000; NLFU = 220 000

Cost push inflation, what are the solutions to cost push inflation what are the solutions to cost push inflation

Objectives of the wto, Objectives of the WTO: The agreement establishi... Objectives of the WTO: The agreement establishing the WTO reiterates the following objectives of the WTO:  •  Raising standards of living and incomes, ensuring full employm