In this problem, we'll study what happens in the basic principal-agent model if the principal is restricted in terms of the fixed payment / participation fee that can be charged. The model is essentially identical to that of lecture 1b. The agent's and principal's payoffs are = 1 2 2 , = . Output equals the agent's effort, = . The agent has zero outside option, = 0. The timing of the model is as usual

c) Given that the principal is required to set = , what range of incentive strengths would the agent be willing to accept in step 2? (Your answer should be given in terms of a range of values, e.g., , and should depend on .)