tute_2 - Hierarchies, incentives and firm structure...

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ECOS 3003 Tutorial 2 1 Hierarchies, incentives and firm structure ECOS3003 Tutorial 2 1. Is it worthwhile for shareholders to seek to completely eliminate incentive problems with managers and directors through means such as monitoring? Why or why not? 2. How does concerns about reputation aid in the enforcement of contracts? 3. Consider a model with one worker who works for one boss. In each period the worker can work hard or not work at all. If the worker works hard she will create $8 worth of profit. The boss can then decide how to share this profit with the worker (that is, how much of the $8 the worker gets). If the worker does not work she creates $0 profit. There are an infinite number of periods and both parties discount future payoffs by δ . There is a social convention that the worker will work hard if in every previous period the boss gave the worker half of the profit. If this is not the case the worker will not work again in any future periods. What is the δ required to sustain this social convention as an equilibrium? Interpret this social convention as an implicit contract.
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This note was uploaded on 08/24/2010 for the course ECOS 3003 taught by Professor Andrewwait during the One '10 term at University of Sydney.

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tute_2 - Hierarchies, incentives and firm structure...

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