Consider a bilateral relationship between an employer and employee, where the output of the firm, q, depends on the effort level, e, exerted by the worker. The probability of occurring is conditional on the effort level of the worker, i.e. Prob = has a VNM utility function given by G(q – w). where W is the wage paid to the worker, while the worker's VNM utility function is given by U(w, e) = u(w) – d(e). The worker has a fallback utility of U. [q = qile] = P;(q)V i = {1,2,..,n}. The employer %3D a. What does it mean to say that information about the worker's effort level is symmetric? b. Solve the employer's maximization problem when information is symmetric. In your answer motivate why the participation constraint binds. c. If information is symmetric, what type of contract should the employer offer if (i) he is risk neutral and the worker is risk averse; (ii) if he is risk averse and the worker is risk neutral

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Consider a bilateral relationship between an employer and employee, where the output of the firm,
q, depends on the effort level, e, exerted by the worker. The probability of occurring is conditional
on the effort level of the worker, i.e. Prob =
has a VNM utility function given by G(q – w). where W is the wage paid to the worker, while the
worker's VNM utility function is given by U(w, e) = u(w) – d(e). The worker has a fallback
utility of U.
[q = qile] = P;(q)Vi = {1,2,..,n}. The employer
a. What does it mean to say that information about the worker's effort level is symmetric?
b. Solve the employer's maximization problem when information is symmetric. In your
answer motivate why the participation constraint binds.
c. If information is symmetric, what type of contract should the employer offer if (i) he is
risk neutral and the worker is risk averse; (ii) if he is risk averse and the worker is risk
neutral
Transcribed Image Text:Consider a bilateral relationship between an employer and employee, where the output of the firm, q, depends on the effort level, e, exerted by the worker. The probability of occurring is conditional on the effort level of the worker, i.e. Prob = has a VNM utility function given by G(q – w). where W is the wage paid to the worker, while the worker's VNM utility function is given by U(w, e) = u(w) – d(e). The worker has a fallback utility of U. [q = qile] = P;(q)Vi = {1,2,..,n}. The employer a. What does it mean to say that information about the worker's effort level is symmetric? b. Solve the employer's maximization problem when information is symmetric. In your answer motivate why the participation constraint binds. c. If information is symmetric, what type of contract should the employer offer if (i) he is risk neutral and the worker is risk averse; (ii) if he is risk averse and the worker is risk neutral
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