Econ808H3.02

# Econ808H3.02 - The Ohio State University Department of...

This preview shows pages 1–2. Sign up to view the full content.

The Ohio State University Department of Economics Econ 808–Problem Set #3 due Thursday, May 2 Spring 2002 Levin and Peck Questions 1 and 2 relate to the principal-agent problem with hidden action presented in class and taken from Mas-Colell chapter 14B. Suppose the parameters are as follows: = 0, π ! [0,1], u f( π " e H ) = 1 for all π ,f ( π " e L ) = 2(1 - π ), There are two possible effort choices, e = e H or e = e L , where e H > e L . The project yields a random payoff, which depends on the effort choice, e, given by the density function f( π " e) over the support [0,1]. 1. Consider the first-best contract, in which effort is observable. Suppose the Bernoulli utility function is given by v(w,e) = log(w-g(e)), where g(e L ) = 1/4 and g(e H ) = 1/3. The contract specifies an effort level, e = e H or e = e L , and a wage profile w( π ) to solve: max ( ( )) ( ) log( ( ) ( )) ( ) . () w wf e d wg e f e d π ππ 0 1 0 1 0 −= subject to: (a) Derive the first order conditions that characterize the optimal wage profile for effort level e.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 2

Econ808H3.02 - The Ohio State University Department of...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online