Question: (a) [25 marks] Describe the 'free-riding problem' in a two-person team project. A successful project yields a bonus of B for each individual and requires

(a) [25 marks] Describe the 'free-riding problem' in a two-person team project. A successful project yields a bonus of B for each individual and requires a total effort that costs E. Write down the payoff matrix for both individuals. Explain the conditions (of B and E) under which the Nash equilibrium is mutually free riding.

(b) [25 marks] What is a complete contract? What are the conditions required to write a complete contract? Provide an example illustrating the difficulties involved in writing a complete contract.

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