b) C) Question 2 In this question, we consider a version of the stealing model with a bonus-only incentive scheme, and where the agent exerts efforts both into producing output and into stealing some of the output. A principal hires an agent to manage a project. The project revenue equals the agent's productive effort e. The agent can steal some of this revenue; if he exerts stealing effort 5, then he steals 5 amount of revenue. So the net prot of the project is the revenue minus the amount stolen, x=es. The agent's effort cost is 51 = e2/ 2 + 52/(2d) where the xed parameter 01 represents the ease of stealing. (Why? Notice that higher at corresponds to a lower effort cost of stealing.) The principal can measure the net prot of the project, but cannot monitor the project revenue and cannot detect if the agent is stealing (and thus cannot punish the agent for stealing). So, all the principal can do is to reward the agent based on net prot: he offers the agent a bonus-only incentive scheme of the form r = bx. The principals payoff is thus the net prot minus the payment to the agent. The agent's payoff is the amount stolen plus the payment from the principal, minus effort cost: 7T=XT, u = s + 1' i q. The timing is as usual: Step 1. Principal chooses 19. Step 2. Agent chooses e and 5. Step 3. Principal pays agent T. For step 2, given the principal's offer (T = bx), write down the agent's maximization problem, and calculate his payoffmaximizing stealing choice 5* as a function of b. For step 1, write down the principal's maximization problem, and calculate his payoff-maximizing choice of incentive strength 17*. (To check your calculation: you should nd that {9* > 1/2 when d AOandb'\" a 1whend a 00.) Your calculation from (b) should conrm that the principal offers stronger incentives if the ease of stealing d increases. Explain, in words, the principal's reasoning for doing so