Consider the following game, with a risk-neutral principal with preferences π = q - w hiring an agent with preferences U = √w-e.. The agent's reservation utility is given by Ū = 2, and the agent can choose between an effort level of 0 or an effort level of 10. Output is either 0 or 400 and follows the following probability distribution, a function of effort level and some uncertain factor: Probability (q=0) Probability (q=400) 0.4 0.9 e=0 0.6 e=10 0.1 a) Illustrate this game of moral hazard using a fully labeled game tree with payouts. b) Write out the agent's incentive compatibility (ICC) and participation constraints (PC).

Consider the following game, with a risk-neutral principal with preferences π = q - w hiring an agent with preferences U = √w-e.. The agent's reservation utility is given by Ū = 2, and the agent can choose between an effort level of 0 or an effort level of 10. Output is either 0 or 400 and follows the following probability distribution, a function of effort level and some uncertain factor: Probability (q=0) Probability (q=400) 0.4 0.9 e=0 0.6 e=10 0.1 a) Illustrate this game of moral hazard using a fully labeled game tree with payouts. b) Write out the agent's incentive compatibility (ICC) and participation constraints (PC).

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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