1. Consider a setting with two workers į 1, 2 who choose how much effort to exert on their individual tasks. Suppose that the effort choice is binary with ej = {0, 1}. The probability of task completion is 1 if the worker exerts ei 1 and p G (0, 1) if ei 0. The cost of exerting effort ei 1 is c> 0, while ei — 0 is costless. Both tasks need to be completed in order for the entire project to be realized. Completing only one of the tasks is useless to the hiring firm. The objective of the firm is to ensure the project completion at the lowest possible cost. Suppose that the firm cannot observe the completion of the individual tasks, but only whether the entire project is realized. The firm commits to public bonus payments to the workers if the project is successfully completed. That is, worker į receives a bonus bi if the project is a success and 0 otherwise. Such a bonus contract induces a simultaneous move game between the two workers who independently decide whether to exert effort on their individual tasks. The
1. Consider a setting with two workers į 1, 2 who choose how much effort to exert on their individual tasks. Suppose that the effort choice is binary with ej = {0, 1}. The probability of task completion is 1 if the worker exerts ei 1 and p G (0, 1) if ei 0. The cost of exerting effort ei 1 is c> 0, while ei — 0 is costless. Both tasks need to be completed in order for the entire project to be realized. Completing only one of the tasks is useless to the hiring firm. The objective of the firm is to ensure the project completion at the lowest possible cost. Suppose that the firm cannot observe the completion of the individual tasks, but only whether the entire project is realized. The firm commits to public bonus payments to the workers if the project is successfully completed. That is, worker į receives a bonus bi if the project is a success and 0 otherwise. Such a bonus contract induces a simultaneous move game between the two workers who independently decide whether to exert effort on their individual tasks. The
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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