Suppose a Principal Knew with Certainty the Level of Profits

question 121

Essay

Suppose a principal knew with certainty the level of profits that would result if an agent put forth maximum effort.
a.Would there be a principal-agent problem?
b.Devise two incentive contracts that would induce the manager to put forth maximum effort in this instance.

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Definitions:

Consumer Reporting Agencies

Organizations that compile and provide credit histories and other financial data on individuals to creditors, employers, and landlords.

Magnuson-Moss Warranty Act

A federal law established in 1975 to improve the clarity and understanding of warranties for consumers, making warranties on consumer products more understandable and enforceable.

Implied Warranties

Legal guarantees that are not explicitly stated but are assumed in transactions, promising that goods are of a certain quality.

Warranty Terms

Conditions and promises made by a seller or manufacturer concerning the quality, functionality, or lifespan of a product.