(g) differ? Explain why. Cons sider a managerial effort example similar to the one in Section 5. The value of a successful project is $420,000; the probabilities of success are 1/2 with good supervision and 1/4 without. The manager is risk neu- tral, not risk averse as in the text, so his expected utility equals his ex- pected income minus his disutility of effort. He can get other jobs paying $90,000, and his disutility for exerting the extra effort for good supervi- sion on your project is $100,000. (a) Show that inducing high effort would require the firm to offer a compensation scheme with a negative base salary; that is, if the project fails, the manager pays the firm an amount stipulated in the scheme. (b) How might a negative base salary be implemented in reality? (c) Show that if a negative base salary is not feasible, then the firm does better to settle for the low-pay, low-effort situation.

(g) differ? Explain why. Cons sider a managerial effort example similar to the one in Section 5. The value of a successful project is $420,000; the probabilities of success are 1/2 with good supervision and 1/4 without. The manager is risk neu- tral, not risk averse as in the text, so his expected utility equals his ex- pected income minus his disutility of effort. He can get other jobs paying $90,000, and his disutility for exerting the extra effort for good supervi- sion on your project is $100,000. (a) Show that inducing high effort would require the firm to offer a compensation scheme with a negative base salary; that is, if the project fails, the manager pays the firm an amount stipulated in the scheme. (b) How might a negative base salary be implemented in reality? (c) Show that if a negative base salary is not feasible, then the firm does better to settle for the low-pay, low-effort situation.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.7P

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