Return to the Situation with the Executive from the Previous

Multiple Choice

Return to the situation with the executive from the previous question. Now assume that shareholders cannot observe effort,so cannot specify how hard the executive works in the contract but must induce it through the incentive scheme. Which of the following wage contracts would work out best for shareholders in equilibrium?

A) A flat wage w = 2,500 with no profit share.
B) A share of 35% of the gross profits.
C) A share of 55% of the gross profits.
D) A share of 70% of the gross profits.