This preview shows page 1. Sign up to view the full content.
Unformatted text preview: W.L.O.G, Let w 3 =0, and w 1 >=0, w 2 >=0. Sales Person: If he accepts the offer, he will compare the EUs to decide on the effort level: EU agent (E H )=.5(w 1-E H )+.5(w 2-E H )=.5(w 1 +w 2 )-E H EU agent (E L )=.5w 2 Therefore, he will carry out high effort if w 1 >=2E H ; low effort otherwise. If its the case that w 1 >=2E H , he will compare the EU of rejecting the offer, i.e. 0, with the EU of accepting the offer and carrying out high level effort. If .5(w 1 +w 2 )-E H >0, he will accept the offer. Otherwise, reject. Similarly if w 1 <2E H , he will accept the offer if w 2 >0. Otherwise, reject. Abe: If w 1 >=2E H , EU Abe (w 1 ,w 2 )=.5(s 1-w 1 )+.5(s 2-w 2 ) If w 1 <2E H , EU Abe (w 1 ,w 2 )=.5(s 2-w 2 ) Given s 1 >2E H , it is optimal for him to set w 1 =2E H and w 2 =0. Therefore, (w 1 ,w 2 ,w 3 )=(2E H ,0,0)....
View Full Document
This note was uploaded on 06/09/2011 for the course ECON 354 taught by Professor Econ during the Spring '11 term at University of Texas at Austin.
- Spring '11