In the Income-Leisure Model, employer pays workers
$3,000 per month and workers promise to work 8 hours a
day. So, employer and employees are happy.
Not so easy. Workers may not put in best effort in each
hour. Then, you may suggest that we watch them work so
that they work hard. But the cost of monitoring is high.
You may say, okay, we fire those who are lazy. But there
are costs to recruitment and high labour turnover is no
good for profit maximization.
This uncertainty about whether an employee will give
his best effort is caused by three factors, namely,
asymmetric information, principal-agent problem and
the cost of monitoring workers.