Employers have long recognized that healthy employees are more productive, and therefore many employers have begun to fi

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Employers have long recognized that healthy employees are more
productive, and therefore many employers have begun to financially
encourage gym attendance by employees. However, sometimes these
payments lead to gym attendance but fairly low effort, since an
individual employee’s effort at the gym is not easily monitored.
Thus, one employer is considering paying employees both for gym
attendance and for passing an annual physical fitness test.
However, the test is only partly related to one’s effort at the
gym.
The requisite data are:
Employee’s
Gym
Chance of Success

Employee’s
Opportunity Cost
Effort
Level

(passing annual
test)


of
effort
Low

25%
$1,500
High

75%
$2,500
For the year, the employer can pay an employee a fixed payment
(f) for gym attendance and a bonus (b) paid only if the employee
attends the gym and passes the annual test. Employees are
risk neutral.