Organizational Economics Model of Incentives and Disagreement Economics Assignment Help

Assignment Task

Question 
In this question, we will consider a model of incentives and disagreement where the principal can
either choose to give the agent an order, or persuade the worker. Unlike the model covered in class,
orders are binding.
There is a (P)rincipal and an (A)gent. ???? works on a project: he chooses effort ???? at cost 1
a binary decision ???? (either ?1 or 1). There is a binary state of the world ???? (either ?1 or 1) that
is not known until after the agent makes his choices. The project is successful if and only if the
action matches the state (???? = ????), in which case the principal receives revenue ???? = ????????, where ???? > 0.
Otherwise, if the project fails, then the principal receives ???? = 0, and the principal also incurs an
additional cost of ???? = 1.
???? can offer ???? an incentive scheme of the form ???? = ????????.
So, the principal’s and agent’s payoffs are
???? = ????[????] ? ????[????] ? {
1 if the project fails
0 if the project succeeds
???? = ????[????] ? ????2
/2.
???? and ???? disagree on how likely each state of the world is. ???? believes that ???? = 1 occurs with probability 1; ???? believes that ???? = 1 occurs with probability 1/3.
At the start of the game, ???? chooses one of two options.
• ???? can give ???? an order ???? (either ?1 or 1). If ???? receives an order, he cannot disobey, and must choose
???? = ????; however, he can choose any effort level he likes.
• Or, ???? can persuade ????. If ???? chooses to persuade, then she is successful 50% of the time: ???? changes
his mind, and believes (like ????) that “???? = 1 will occur with probability 1”. The other 50% of the time,
persuasion fails: ???? continues to believe that “???? = 1 will occur with probability 1/3”.

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