Question

Which of the following will be most effective in motivating the employee (in solving the manager-worker...

Which of the following will be most effective in motivating the employee (in solving the manager-worker principal-agent problem)? You must give an explanation and state clearly any assumptions you make.

A. Piece rate
B. Profit sharing
C. Revenue sharing
D. Annual salary

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Homework Answers

Answer #1

Option B is correct

In a principal agent problem the agent is likely to work in its own interest which is the maximization of its compensation and minimization of work effort. When there is a fixed salary such as an annual salary or a piece rate, there are limited incentive to put the best effort on the job because the salary is fixed and will not be increased with increased effort. The piece rate also becomes ineffective once the competitive wages are earned.

Profit sharing is more effective because the aim of the agent as well as that of the principal are both achieved. Agent will put their best effort in maximizing the profit because this will maximize their on compensation. And when the profit is maximized the aim of the the principal is also achieved.

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