What payoffs would be required under an optimal incentives contract, similar to Table, if the cost overruns at Apple became as likely as those at Motorola?

Transcribed Image Text:

EXPECTED NET PROFIT SHARES (MILLIONS) WITH TRUE COST REVELATION UNDER AN OPTIMAL INCENTIVES CONTRACT APPLE NET REVENUE SHARES PROJECTEDNET PROFIT PROBA BILITY 0.7 0.3 COSTS $80 S60 $74 SHARES $120 S 65 $103.5 Lowa $28 Higha 1.5 Expected Value $29.5 MOTOROLA NET REV ENUE PROJECTED NET PROFIT PROBABILITY 0.5 0.5 COSTS S50 $49 $49.5 SHARES SHARES Low $88 $70 $79 $19 S10.5 $29.5 High Expected Value