ECON 704 Midterm: Prelim2013A-1_Cole_704
Document Summary
There is a principal and agent who enter into a production/insurance arrangement. In each period the agent chooses how much to work. The agent is subject to both a production, (cid:18); and a disutility of e ort, ! shock which are his private information. One unit of e ort produces (cid:18) units of output where (cid:18) 2 (cid:2) = f(cid:18)1; :::; (cid:18)n g ; where (cid:18)i < (cid:18)i+1: the agent(cid:146)s disutility shock ! The principal(cid:146)s is given by y = (cid:18)l: y (cid:0) c: Assume that both the principal and the agent care about their expected payo s and discount future payo s (where relevant) at rate (cid:12): consider a one-period version of this model. De(cid:133)ne a contract between the principal and the agent. To standardize notation, use "y" for output and "c" for consumption in your contract: characterize the optimal one-period contract using your contract- ing problem.
