1. Consider a principalagent relationship where agent's effort, e, is not observable by the Principal, and hence it is not contractible. Agent's output, 1, is however contractible. Agent's output is linked to agent's effort by the following relationshipzsJ z=e+m (.1 where x is a stochastic noise with E(x) = 0 and Varix) = 2. (As in the lectures, El.) and Varl.) denote the operators expected value and variance, respectively)\" (.1 The principal is risk neutral and has full bargaining power in designing the optimal linear contract w = 01+ [92 , where w denotes the agent's wage. 4' (.1 The preference of the risk aversia agent is such that the certainty equivalent wealth of any risky income, I, is given by