Compute the efficient effort efb (first best), and the effort that will be actually chosen with group incentives.

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
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2. Consider an example of the Alchian and Demsetz theory of team production. Suppose the individual
production is q= 5e, and the team production is Q = 5[1 ei]. There are N = 8 members in the team
who will share the total output equally.
0.25e²
is the cost of effort. In
2
The utility function in individual production is u
team production, the utility function of individual members is u;= wi- c(e), where wi = Q/N is the
group incentive.
Compute the efficient effort efb (first best), and the effort that will be actually chosen with group
incentives.
qi-c(e), where c(e):
=
Transcribed Image Text:2. Consider an example of the Alchian and Demsetz theory of team production. Suppose the individual production is q= 5e, and the team production is Q = 5[1 ei]. There are N = 8 members in the team who will share the total output equally. 0.25e² is the cost of effort. In 2 The utility function in individual production is u team production, the utility function of individual members is u;= wi- c(e), where wi = Q/N is the group incentive. Compute the efficient effort efb (first best), and the effort that will be actually chosen with group incentives. qi-c(e), where c(e): =
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