The success of a project depends on the effort level of a worker. In case of success the revenues will be $300,000 whereas in case of no-success the revenue 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 $50,000 to provide the low effort level and an expected salary of $60,000 to provide the high effort level. The success probabilities for the project are 70% in case of high effort level and 50% in case of low effort level. The compensation package consists of the base salary, s, and the bonus, b, paid out in case of the project's success. What should the base salary be for the worker in an optimal contract? a. $15,000 b. $25,000 c. $30,000 d. $40,000 e. $50,000
The success of a project depends on the effort level of a worker. In case of success the revenues will be $300,000 whereas in case of no-success the revenue 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 $50,000 to provide the low effort level and an expected salary of $60,000 to provide the high effort level. The success probabilities for the project are 70% in case of high effort level and 50% in case of low effort level. The compensation package consists of the base salary, s, and the bonus, b, paid out in case of the project's success.
What should the base salary be for the worker in an optimal contract?
| a. |
$15,000 |
|
| b. |
$25,000 |
|
| c. |
$30,000 |
|
| d. |
$40,000 |
|
| e. |
$50,000 |
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