 Hidden ActionChapter 9 in Microeconomics with Spreadsheets, 2017, pp 125-133 from World Scientific Publishing Co. Pte. Ltd. Abstract: Here the parties do not have any private information prior to the contracting, but after the contract is signed, one of the parties can take an unobservable action that affects the payoffs of the other party. The leading example in the viewof the widespread separation of the ownership and the control is the following: A firm’s owners hire a manager to run a firm. The managers chooses the effort level e she is willing to put in her work, e ∈ {e1, … , en} (or e ∈ [0,∞)). Cost of effort is C(e), where C(·) is an increasing, convex function. Conditional on the effort level e, the firm’s profit is distributed according to a cumulative distribution function F(π|e) and e1 > e2 ⇒ F(π|e1) ≤ F(π|e2) for all π, i.e., F(π|e1) first order stochastically dominates F(π|e2) (review the section on the stochastic dominance). This means that effort improves the distribution of profits for the owners (as long as they prefer more to less), but some uncertainty still remains. The manager is risk averse and her Bernoulli utility is given by,\[u{\rm{(}}w{\rm{, }}e{\rm{) = }}v{\rm{(}}w{\rm{) - }}C{\rm{(}}e{\rm{)}}{\rm{.}}\] Keywords: Microeconomics; Game Theory; Producer Theory; Consumer Theory; Economics of Information; Basics of Industrial Organization; Excel; The Solver (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:wsi:wschap:9789813143968_0009 Ordering information: This item can be ordered from Access Statistics for this chapter More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd. |
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