A Risk-Averse Manager Is Hired to Run a Firm for Shareholders

Multiple Choice

A risk-averse manager is hired to run a firm for shareholders. If the manager's effort can be observed and specified in a contract,which would be the best employment contract?

A) a high-powered incentive contract to elicit the most effort.
B) a fixed salary paid as long as the required effort is undertaken.
C) a proportion of profits paid as long as the required effort is undertaken.
D) a wage well in excess of his or her outside opportunity.