What activities does the organization engage in? How is the organization structured? How are members motivated to work on behalf of the organization? We will consider these questions by primarily relying on economic analysis but also take up some of the issues from the vantage of other social sciences.
I wouldn't look at this till you've done the Excel Homework on the Principal-Agent Model. But then, this Exam should be intelligible to you. Also note, question 2 from last year's Midterm 1 is fair game as well.
In part two of practice midterm two, could you further explain the difference between the individual rationality constraint and the incentive compatibility constraint?
The Incentive constraint is the one that encourages the agent to take the higher effort level. It requires the payment stream to be sufficient risky, with higher payment when there is higher output. Taking more effort increases the likelihood of the agent earning the higher payment.
The individual rationality constraint says that since the agent has a viable outside option the agent's expected utility on this job, including the disutility of effort, has to be at least as high as what the agent can get with the outside option.
Since Expected Utility depends on both the risk and the levels of the payments, you really need to look at both for both constraints, in general. The exam was written, however, to make comparisons with particular reference points, so you can focus on one or the other.
Would you be able to post the second midterm through another medium? It won't let me log in to access the document.
ReplyDeleteI am experiencing the same problem.. I would really appreciate the second midterm re-uploaded via another method that I can gain access. Thank you!
ReplyDeleteSorry - I missed these comments. Please try now. It should work.
ReplyDeleteIn part two of practice midterm two, could you further explain the difference between the individual rationality constraint and the incentive compatibility constraint?
ReplyDeleteThe Incentive constraint is the one that encourages the agent to take the higher effort level. It requires the payment stream to be sufficient risky, with higher payment when there is higher output. Taking more effort increases the likelihood of the agent earning the higher payment.
ReplyDeleteThe individual rationality constraint says that since the agent has a viable outside option the agent's expected utility on this job, including the disutility of effort, has to be at least as high as what the agent can get with the outside option.
So we would be looking at risk for the IC constraint and the wL and wH levels for the IR constraint?
DeleteSince Expected Utility depends on both the risk and the levels of the payments, you really need to look at both for both constraints, in general. The exam was written, however, to make comparisons with particular reference points, so you can focus on one or the other.
DeleteSo how would one differentiate between options B and C in part 2?
Delete