A Movie Producer Is Negotiating with an Up-Coming Director to Direct

Essay

A movie producer is negotiating with an up-coming director to direct its next summer action film. The director's latest movie has been well-received and there is talk that he might be nominated for an academy award. The producer believes the director is currently worth a $500,000 fee but would be worth a $2 million fee if he is nominated for an Oscar (these are the producer's reservation prices). For his part, the director's current walk-away price is $300,000 but it would rise to $1.5 million with an Oscar nomination. The producer thinks the chance of a nomination is 0.3; the director thinks it is 0.6.
(a) Can the parties agree on a flat dollar fee? If so, what is the zone of agreement?
(b) Is negotiating a contingent fee a better option for the parties? Explain.