387hw2 - Economics 387. Banking and Financial...

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Economics 387. Banking and Financial Intermediation. Spring 2002. Department of Economics, University of Texas Instructor: Dean Corbae, BRB 3.118, (o) 512-475-8530 email: corbae@eco.utexas.edu, web: www.eco.utexas.edu/~corbae Homework #2 - Q1 due 2/6/02, Q2 due 2/13/02 1) Consider the following parameterized version of Holmstrom (1979). The agent has preferences u : R + e H ,e L } R given by u ( c, e )= exp( c ) e and has an outside option given by ω. The principal is risk neutral. The distributions of output, conditional on e f ort level e ,areg iven by F ( y | e H )= y F ( y | e L )= y α where α (0 , 1) and y (0 , 1] . a) Does F ( y | e H ) rst order stochastic dominate F ( y | e L ) ? Is the likelihood ratio f ( y | e L ) f ( y | e H ) monotonically decreasing in y ? b) Suppose e f ort is fully observable. De ne and derive the pareto frontier. Provide conditions on the parameter space under which the principal o f ers a contract that induces high e f
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This note was uploaded on 08/06/2008 for the course ECON 387 taught by Professor Corbae during the Spring '07 term at University of Texas at Austin.

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387hw2 - Economics 387. Banking and Financial...

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