gency_Prob_sol - UBC COMM 295 Solution to Moral...

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1 UBC COMM 295 Solution to Moral Hazard/Agency Problem 1. Your firm needs to hire an accountant. There are three types of accountants (1000 of each type): good, medium and bad. The value of the hourly contribution of these accountants towards your firm’s profits equals $500, $300 and $100 respectively. The reservation hourly wage (i.e., opportunity cost) of these accountants equals $310, $190 and $100, respectively. You are unable to distinguish among the three types of accountants. Determine which of the three types of accountants will offer their services to your firm and what you will offer to pay per hour in equilibrium. (Assume you pay the expected value of the accountant’s hourly contribution toward your firm’s profits). What type of problem is this (i.e., moral hazard, adverse selection, signaling, principal-agent, etc.)? The expected contribution from a randomly chosen accountant is ($500 + $300 + $100)/3 = $300 If your offer fee F = $300, good accountants will not work since their cost is $310. Thus,
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This note was uploaded on 05/11/2011 for the course COMM 295 taught by Professor Ratna during the Winter '09 term at The University of British Columbia.

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gency_Prob_sol - UBC COMM 295 Solution to Moral...

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