The success of a project depends on the effort level of a worker. In case of success the revenues will be 400,000 TL whereas in case of no-success the revenues will be 0. The worker can provide a low effort level or a high effort level. The effort level cannot be observed by the principal. The worker requires an expected salary of 60,000 TL to provide the low effort level and an expected salary of 80,000 TL to provide the high effort level. The success probabilities for the project are 40% in case of low effort level and 80% in case of high effort level. What should be the minimum bonus (that is awarded in addition to the base salary in case of success) and the base salary for the worker so that the worker has the incentives to provide the high effort level?
The success of a project depends on the effort level of a worker. In case of success
the revenues will be 400,000 TL whereas in case of no-success the revenues will be 0. The worker
can provide a low effort level or a high effort level. The effort level cannot be observed by the
principal. The worker requires an expected salary of 60,000 TL to provide the low effort level
and an expected salary of 80,000 TL to provide the high effort level. The success probabilities
for the project are 40% in case of low effort level and 80% in case of high effort level. What
should be the minimum bonus (that is awarded in addition to the base salary in case of success)
and the base salary for the worker so that the worker has the incentives to provide the high
effort level?
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