PS9

Question 1

Draw the full information case in PA dillemma

Answer 1

Question 2

what do indiff curves represent?

Answer 2

paricipation constraint, principal maximises s.j.t it

Question 3

how do we find the wages in a contingent profit situation with Assymetric information?

Answer 3

assume high effort for participation

solve for ICCC

solve simultaneous via substitution

Question 4

how do we compute the agency cost?

Answer 4

calculate the expected wage with assymetric information

compare to fi high effort wage

E(w) - wH

Question 5

HOw do we see if the agency cost is worth it?

Answer 5

We calculated expected utility for both the contingent contract and versus low wage outcome

if shes better off with low wage then she acc prefers that as agency cost too high to motivate them

Question 6

How do we know how much will be paid for full information?

Answer 6

Compare how much she gets optimally in FI, vs her highest payoff in AI

thus pays the differences (the gaim from FI)

Question 7

If there is no cost of effort due to intrinsic motivation, what changes

Answer 7

No ICC or particpation constraint necessary –> as no moral hazard as effort isnt costly

lawyer will simply work for fixed wage of outside option

Question 8

Lazear ideas on moral hazard

Answer 8

• Relative Pay and Tournament Theory
• Career Incentives and the Experience–Earnings Profile