A principal has different options of setting wages and the Agent has different levels of work....

A principal has different options of setting wages and the Agent has different levels of work. Consider this model with the following special values:

u(2√w); d_H=15, d_L=0, g=300, m=200, b=100, w_b=wage base=0

e_H results in a probability of profit levels g, m, b as 0.5, 0.3, 0.2

e_L results in a probability of profit levels g, m, b as 0.2, 0.3, 0.5

Assuming the Principal chooses a pure wage scheme, what would be the expected payoffs for the Principal and the Agent?

Assuming the Principal chooses a pure franchise scheme, what would be the maximum franchise fee? What would be the expected payoffs for the Principal and the Agent?

Assuming the Principal chose a wage plus bonus scheme, what is the minimum bonus to induce e_H? What would be the expected payoffs for the Principal and the Agent? Assume the bonus is awarded only for good, not for medium.

In this scenario, what should the Principal choose to do?

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Expert Solution

Rahul Sunny answered 1 year ago

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