2. Consider a simple model of moral hazard model from lecture: There are one principal and...
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2. Consider a simple model of moral hazard model from lecture: There are one principal and one agent. Time 0. Principal offers a contract. Time 1. Agent accepts or rejects the contract. Principal obtains 0, and agent gets u20 if agent rejects it, and proceed if agent accepts it. Time 2. Agent chooses an action. Time 3. Outcome is realized. Time 4. The contract is executed. Agent chooses either a high effort e = 1 or a low effort e = 0. is principal's payoff and 7 € {TS, TF} wherе TS (TF) payoff when agent suc- ceeds (does not). p(e) is the probability that agent succeeds at the task when agent works (does not work) with p (1) > p (0). ws (wF) denotes agent's wage when agent succeeds at the task. Agent's payoff is u (w, e) = v(w) - ce where v (0) = 0, v () is strictly increasing and concave. (a) If the principal can observe the agent's action, solve the principal's maxi- mization problem. Now, suppose the principal cannot observe the agent's action. (b) If v() is linear such that v (w) =w, solve the principal's maximization problem. (c) If v() is strictly concave such that v" (w) < 0, solve the principal's maxi- mization problem. 2. Consider a simple model of moral hazard model from lecture: There are one principal and one agent. Time 0. Principal offers a contract. Time 1. Agent accepts or rejects the contract. Principal obtains 0, and agent gets u20 if agent rejects it, and proceed if agent accepts it. Time 2. Agent chooses an action. Time 3. Outcome is realized. Time 4. The contract is executed. Agent chooses either a high effort e = 1 or a low effort e = 0. is principal's payoff and 7 € {TS, TF} wherе TS (TF) payoff when agent suc- ceeds (does not). p(e) is the probability that agent succeeds at the task when agent works (does not work) with p (1) > p (0). ws (wF) denotes agent's wage when agent succeeds at the task. Agent's payoff is u (w, e) = v(w) - ce where v (0) = 0, v () is strictly increasing and concave. (a) If the principal can observe the agent's action, solve the principal's maxi- mization problem. Now, suppose the principal cannot observe the agent's action. (b) If v() is linear such that v (w) =w, solve the principal's maximization problem. (c) If v() is strictly concave such that v" (w) < 0, solve the principal's maxi- mization problem.
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a If the principal can observe the agents action the principals optimization problem is as follows M... View the full answer
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