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
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Hi, questions are in the screenshot image. below is the advanced
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
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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