Consider a firm in which a principal and an agent simultaneously make their choice of action....

 

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Consider a firm in which a principal and an agent simultaneously make their choice of action. A principal can opt to centralise (C) or delegate (D). The agent's choices are whether to put in high effort (H) or low effort (L). The payoffs are as follows. If the principal opts for C and the agent H the payoffs are (11, 6) to the principal and agent, respectively. If the choices are (C, L) the payoffs are (9,8). If the principal opts for D and the agent H the payoffs are 10 to each party. Finally, if the principal choses D and the agent L, the payoffs are (7, 12) to the principal and agent, respectively. If this game is played twice. Specifically, the principal and the agent play with game once, the outcome is observed by all, then they play the game again. What is the subgame perfect equilibrium? Consider a firm in which a principal and an agent simultaneously make their choice of action. A principal can opt to centralise (C) or delegate (D). The agent's choices are whether to put in high effort (H) or low effort (L). The payoffs are as follows. If the principal opts for C and the agent H the payoffs are (11, 6) to the principal and agent, respectively. If the choices are (C, L) the payoffs are (9,8). If the principal opts for D and the agent H the payoffs are 10 to each party. Finally, if the principal choses D and the agent L, the payoffs are (7, 12) to the principal and agent, respectively. If this game is played twice. Specifically, the principal and the agent play with game once, the outcome is observed by all, then they play the game again. What is the subgame perfect equilibrium?

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In a subgame perfect equilibrium SPEeach player acts optimally at each decision pointgiven the ... View the full answer