. . Suppose a firm's sales are given by S = 8e, where e is the...
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. . Suppose a firm's sales are given by S = 8e, where e is the level of effort provided by its employee. Because e is unobservable to the employer, she delegates the use of the assets required to perform the tasks to her employee. The latter chooses his level of effort to maximize his utility net of the cost of effort U = I - C(e) where I is the income obtained by the employee and C(e) = e2 is the employee's total cost of effort. The firm's payoff or profit is dictated by the contractual terms and the employee's outside option is U = 4. Suppose the employer uses a sales-based royalty contract whereby the employee pays royalties p based on sales to the employer or, stated differently, retains (1 - p).S. Determine the level of effort chosen by the employee as a function of the royalty e(p), the size of the royalty p that ensures the employee's participation constraint is satisfied, the effort level eº, and the employer's payoff. Suppose the employer uses a fixed-fee contract whereby the employee pays the fixed fee F to the employer or, stated differently, retains SF. Determine the level of effort chosen by the employee, the value taken by F that ensures the employee's participation constraint is satisfied, and the employer's payoff. Suppose the employer uses a value-based royalty contract whereby the employee pays royalties p based on the difference between sales and the cost of effort to the employer or, stated differently, retains (1-7) [S-C(e)]. Determine the level of effort chosen by the employee, the size of the royalty that ensures the employee's participation constraint is satisfied, the effort level e, and the employer's payoff. Determine the contract(s) preferred by the employee and the employer. . . Suppose a firm's sales are given by S = 8e, where e is the level of effort provided by its employee. Because e is unobservable to the employer, she delegates the use of the assets required to perform the tasks to her employee. The latter chooses his level of effort to maximize his utility net of the cost of effort U = I - C(e) where I is the income obtained by the employee and C(e) = e2 is the employee's total cost of effort. The firm's payoff or profit is dictated by the contractual terms and the employee's outside option is U = 4. Suppose the employer uses a sales-based royalty contract whereby the employee pays royalties p based on sales to the employer or, stated differently, retains (1 - p).S. Determine the level of effort chosen by the employee as a function of the royalty e(p), the size of the royalty p that ensures the employee's participation constraint is satisfied, the effort level eº, and the employer's payoff. Suppose the employer uses a fixed-fee contract whereby the employee pays the fixed fee F to the employer or, stated differently, retains SF. Determine the level of effort chosen by the employee, the value taken by F that ensures the employee's participation constraint is satisfied, and the employer's payoff. Suppose the employer uses a value-based royalty contract whereby the employee pays royalties p based on the difference between sales and the cost of effort to the employer or, stated differently, retains (1-7) [S-C(e)]. Determine the level of effort chosen by the employee, the size of the royalty that ensures the employee's participation constraint is satisfied, the effort level e, and the employer's payoff. Determine the contract(s) preferred by the employee and the employer.
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Answer rating: 100% (QA)
For the salesbased royalty contract the level of effort chosen by the employee is ep sqrtIpS2 The si... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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