Assume the role of the head of the Human resources department at a large corporation. You...

 

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Assume the role of the head of the Human resources department at a large corporation. You must design a contract for the next CEO. Your sources have given you the following quantitative data to help you decide. A typical CEO has a reservation wage of $150,000. Their cost of putting out a high effort is equivalent to $50,000, while the cost of low effort is 0. They are aggressive and think only of the expected outcome; in other words, they are risk neutral: U(wage, effort) = wage - c(e). The revenue of a successful project is $1,000,000, and the revenue from an unsuccessful project is zero. The probability of success with high effort is 0.7. With low effort, the probability of success is 0.3 1. What contract should be offered so that the CEO will put in a high level of effort if you assume the low-level effort contract is a base salary equal to the reservation wage? Now take on the role of the chief investor in the company. 2. What level of effort will give the highest expected profit? Assume the role of the head of the Human resources department at a large corporation. You must design a contract for the next CEO. Your sources have given you the following quantitative data to help you decide. A typical CEO has a reservation wage of $150,000. Their cost of putting out a high effort is equivalent to $50,000, while the cost of low effort is 0. They are aggressive and think only of the expected outcome; in other words, they are risk neutral: U(wage, effort) = wage - c(e). The revenue of a successful project is $1,000,000, and the revenue from an unsuccessful project is zero. The probability of success with high effort is 0.7. With low effort, the probability of success is 0.3 1. What contract should be offered so that the CEO will put in a high level of effort if you assume the low-level effort contract is a base salary equal to the reservation wage? Now take on the role of the chief investor in the company. 2. What level of effort will give the highest expected profit?

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1 To design a contract that incentivizes the CEO to put in a high level of effort we need to consider the expected utility of their compensation The C... View the full answer