You are about to start working at a car dealership that is currently reporting losses due to the car shortage associated with the Covid-19 pandemic but will be profitable next year. Assume you are risk-averse and your supervisor cannot fully monitor your actions. The key metrics at this dealership include both financial data (number of sales, margin on sales) as well as qualitative data (survey of experience). You are tasked with designing a compensation contract for yourself. Please answer questions 1-4 separately, then write the memo in question 5. 

1. Suppose the dealership has a tax loss in the current period of $200 and previous tax losses of $100, giving them a total tax NOL carryforward of $300. The top statutory tax rate is 21%. Assume an after-tax discount rate of 10% and a future taxable income of $50 per year. What is the firm's marginal explicit tax rate? 
2. Prior to writing a contract it is important that both parties understand the key considerations around working for this car dealership. Discuss both tax and nontax factors from the employee perspective and do the same from the employer's perspectives. Please do provide some intuition on why these are factors that may affect either parties' decision (e.g., why would you, the employee, want a 401k?) 
3. What are moral hazard and adverse selection issues?  Please include citations for this discussion. Understanding that these issues could be present at a car dealership, discuss clauses that could be included in the contract and how they mitigate specific moral hazard/adverse selection issues. 
4. Discuss the concept of risk aversion and how different aspects of a contract are more or less desirable depending on a individual's level of risk aversion? 
5. Write a basic compensation contract with points 1-4 in mind. This contract should represent a compromise (i.e., includes items that both parties want). Keep this contract to a single page. You will be graded on creativity, presentation, and writing clarity. You may use a built-in from Word or other template (please cite your source).

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1 What is the firms marginal explicit tax rate To calculate the firms marginal explicit tax rate we need to consider the tax loss carryforward the statutory tax rate the aftertax discount rate and the ... View the full answer