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Eleanor is COO of a construction company, Quality Builders, that uses subcontractors for the electrical, water and air-conditioning needs of their buildings. Eleanor is looking into hiring an electrical subcontractor, Lights-On Electric, for a one-time project, offering them a commission of $500,000. If given the project, Lights-On can choose high effort (use quality products, put in extra time to make sure job is completed fully, etc.) or low effort. High effort costs them $450,000 while low effort costs them $300,000. Moreover, if Lights-On chooses high effort, then they add $700,000 of value to the project for Quality Builders, while if they use low effort they contribute $400,000 in value. It is impossible to observe the level of effort exerted by Lights-On until after the completion of the project, so their choice of effort is a hidden action.
(a) Represent this interaction between Quality Builders and Lights-On as a game.
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