Consider the setting where principals compete for workers described in class where workers may have a high or a low productivity.

This is captured assuming that high ability workers have a higher probability of generating a high value output relative to low ability workers.

We showed that, under asymmetric information, IF$$there exists an equilibrium THEN the contract offered to high ability workers is NOT efficient meaning that both, the high ability worker and the principal could potentially be better$-$off renegotiating the contract.

How can this be$?$

Question $3$ options:

At the equilibrium, any contract that would increase the high ability workers' expected utility would also attract the low ability workers. While the employer offering it would make profits overall, no employer wants to contract low ability workers.

At the equilibrium, any contract that would increase the high ability workers' expected utility would NOT be appealing to the low ability workers but would result in losses for the employer offering it$.$

At the equilibrium, any contract that would increase the high ability workers' expected utility would also attract the low ability workers resulting in losses for the employer offering it$.$

At the equilibrium, only one of the contracts has to be efficient. It would be possible to keep an efficient contract for the high ability worker provided the one offered to the low ability worker became inefficient.