- Suppose There Is A Risk Neutral Firm Considering Hiring A Manager For A Project The Manager Can Either Exert A Low Ef 1 (69.5 KiB) Viewed 45 times
= Suppose there is a risk-neutral firm considering hiring a manager for a project. The manager can either exert a low effort, et, with associated disutility g(el) = 2, or a high effort, eh, with associated disutility g(eh) = 4. The manager's effort is not observable to the firm and her reservation utility is ū = 10. A wage of w gives a utility of v(w) = VW for the manager. The project has outcome th if the project is successful and al if the project is unsuccessful. The probability of success conditional on effort is given by f(thel) = 2/5 and f(theh) = 3/5. Find the optimal contract for the firm to offer to the manager when (i) TL = 120, TH = 300 and when (ii) TL = 130, 7H = 150.