Exam 19: Contracts and Moral Hazards

Suppose the probability of an employee being caught shirking,q,is a function of the employer's monitoring,M,such that q = M/100.If workers must put up a $1,000 bond and the gain to each worker from shirking is $100,what is the employer's optimal level of monitoring that is just sufficient to discourage shirking?

Suppose a plaintiff hires a lawyer to represent her in a court case.She agrees to pay the lawyer a wage per hour.She knows precisely what the lawyer should do and how long each activity should take,and she can verify that the lawyer has correctly completed each activity.She can terminate the contract at any time.With this contract,

Which of the following would not be used by firms to deter shirking?

A contingent contract can create production inefficiency; however,many principals accept this because

Suppose a plaintiff hires a lawyer to represent her in a court case.Under which of the following contracts is efficiency in risk bearing assured?

A good salesperson can sell $1,000,000 worth of goods,while a poor one can sell only $100,000 worth of goods.Job applicants know if they are good or bad,but the firm does not.A firm will offer job applicants a choice between a fixed salary or a 20% commission.Assuming risk-neutral salespersons and no opportunistic behavior,what level must the fixed salary be so that the firm can determine a prospective good salesperson from a poor one?

In the presence of asymmetric information,the only contract that results in production efficiency and no moral hazard is the one in which

Monitoring is often used by firms in an attempt to decrease

Suppose a plaintiff hires a lawyer to represent her in a court case.To which of the following contracts would a highly risk-averse plaintiff agree?

Alex is hired as a sales agent and receives 10% commission on the sales price.The contract he signed is a

Workers prefer layoffs to wage reductions during economic downturns because

In which of the following contracts is the agent's payment unaffected by his performance?

When does it make sense to offer a worker a piece-rate contract?

Sam is suing someone in court for $10,000.The probability that Sam will lose the case is 1/h where h is the number of hours that Sam's attorney works on the case.The lawyer charges $500 per hour if he is to be paid hourly,or he requests 20% of the settlement if he is to be paid on a contingency basis.Assuming both Sam and the attorney are risk-neutral wealth maximizers,is either contract efficient?

Suppose an employer has monitoring devices established so that the probability of an employee being caught while shirking is 0.2.If the gain to the employee from shirking is $1,000,how large a bond will deter shirking?

Suppose the principal offers to share a percentage of the profit with the agent.Such a contract

The market demand for MP3 player is p = 50 - 0.5Q,and the marginal cost for Nick to obtain and sell a MP3 player is $10.If he signed a fixed-fee rental contract with the store owner and pays $1000 as the rent,

One reason that lawyers might prefer a contingent contract when representing a plaintiff in a tort case is that

Suppose a plaintiff hires a lawyer to represent her in a court case.The lawyer will receive a share of the settlement if the plaintiff wins.Under this contract,

Under which one of the following conditions would a lawyer accept a case on a contingent basis?