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Consider the following principal agent problem with moral hazard (effort is not contractible). The firm's profits are given by: π = e + 2, where e is the manager's effort and z is a random variable with E(2) = 0, Var(z) = o². Assume that the contract is given by the linear payment scheme: w = a + bà, where a is a fixed salary and b is the share of profits. The agents's cost of supplying effort is c = .5e², so his net income is y = wc. Let his utility, u, be given by the linear mean- variance utility function, u = E(y) - .5R Var(y), where R > 0 is a parameter (capturing risk aversion). Find the solution to this principal agent problem (the optimal valuos of a b and el

Consider the following principal agent problem with moral hazard (effort is not contractible). The firm's profits are given by: π = e + 2, where e is the manager's effort and z is a random variable with E(2) = 0, Var(z) = o². Assume that the contract is given by the linear payment scheme: w = a + bà, where a is a fixed salary and b is the share of profits. The agents's cost of supplying effort is c = .5e², so his net income is y = wc. Let his utility, u, be given by the linear mean- variance utility function, u = E(y) - .5R Var(y), where R > 0 is a parameter (capturing risk aversion). Find the solution to this principal agent problem (the optimal valuos of a b and el

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Hi, questions are in the screenshot image. below is the advanced microeconomics course, lecture: Imperfect Information, I include the topics as if they do any help.

 

Lecture: Imperfect Information syllables

1 Asymmetric Information

1.1 Principal-Agent Problems with Hidden Actions

1.2 General Discussion

 

2 TheGeneral-Principal Agent

 

3 A Simple Example of a Principal-Agent Problem

3.1 CASE1: FULL INFORMATION

3.2 Case2- Unobserved Effort

 

4 Principal-Agent - Hidden Information

4.1 CaseI: Complete Information

4.2 Diagram

4.3 CaseII: HiddenInformation

 

5 Education as a Signal

5.1 Perfect Information

5.2 Imperfect Information

5.3 Equilibrium (perfect Bayesian, PBE)

 

6 The Market for Lemons

6.1 Warranties as a Signal for Quality

 

7 Static Price Competition with Asymmetric Information

7.1 Revelation of Information 

Consider the following principal agent problem with moral hazard (effort is not contractible). The firm's profits are given by: π = e+ z, where e is the manager's effort and z is a random variable with E(z) = 0, Var(z) = o². Assume that the contract is given by the linear payment scheme: w = a + bë, where a is a fixed salary and b is the share of profits. The agents's cost of supplying effort is c = .5e², so his net income is y = W c. Let his utility, u, be given by the linear mean- variance utility function, u = E(y) .5R Var(y), where R> 0 is a parameter (capturing risk aversion). Find the solution to this principal agent problem (the optimal values of a, b and e).
Transcribed Image Text:Consider the following principal agent problem with moral hazard (effort is not contractible). The firm's profits are given by: π = e+ z, where e is the manager's effort and z is a random variable with E(z) = 0, Var(z) = o². Assume that the contract is given by the linear payment scheme: w = a + bë, where a is a fixed salary and b is the share of profits. The agents's cost of supplying effort is c = .5e², so his net income is y = W c. Let his utility, u, be given by the linear mean- variance utility function, u = E(y) .5R Var(y), where R> 0 is a parameter (capturing risk aversion). Find the solution to this principal agent problem (the optimal values of a, b and e).
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