- Question 3 Consider The Following Principal Agent Problem With Hidden Action The Agent Can Engage In High Effort Medi 1 (83.13 KiB) Viewed 29 times
Question 3. Consider the following Principal-Agent problem with Hidden Action. The agent can engage in High effort, Medium effort, or Low effort, so A = {L, M, H}, has linear utility u(x) = x, and outside option ū = 0). After performing the action, the agent produces output of either r = 0 or r = 100 according to the probability shown in a. a= L a = = x = 0 3/4 I= 100 1/4 Ma= EH 1/2 1/4 1/2 3/4 The cost to the agent of performing the actions are c(L) = 0, (M) = 10, and c(H) = 40. Find a payment structure s = (S0, S100) which maximises the expected profit for the principal, and satisfies the participation and incentive compatibility requirements for the agent. (Bonus): Describe the set of all payment structures which maximise the expected profit for the principal (and justify why this is all of them).