Question 6 (2 points) Consider a situation where a principal hires an agent who may be...

Transcribed Image Text:

Question 6 (2 points) Consider a situation where a principal hires an agent who may be "good" or "bad". Not being able to identify the type of the agent, she must design two contracts (WG, eG) and (WB, EB) stipulating an effort level (e) and an associated wage (w). The utility of the agent is given by U=w-Be² where B= 2 for the "good" type and B= 4 for the "bad" type. The agent's reservation utility is equal to 120. Which of the following are the correct incentive constraints that the contracts must satisfy? Ow-4(e)² ≥ 120 WG-2(ec)2 ≥ WB-2 (еB)² Owc-2(ec)² ≥ 120 WB-4(еB)² ≥ WG - 4(ec)² Question 6 (2 points) Consider a situation where a principal hires an agent who may be "good" or "bad". Not being able to identify the type of the agent, she must design two contracts (WG, eG) and (WB, EB) stipulating an effort level (e) and an associated wage (w). The utility of the agent is given by U=w-Be² where B= 2 for the "good" type and B= 4 for the "bad" type. The agent's reservation utility is equal to 120. Which of the following are the correct incentive constraints that the contracts must satisfy? Ow-4(e)² ≥ 120 WG-2(ec)2 ≥ WB-2 (еB)² Owc-2(ec)² ≥ 120 WB-4(еB)² ≥ WG - 4(ec)²

Answer rating: 100% (QA)

The detailed ans... View the full answer