Reference no: EM13698987
Dan and Ann are chemical engineers working for a biotech company. Both are risk-neutral and have disutility of effort given by C(e) = 2e2.
Their supervisors have indicated that the one who produces more publications in scientific journals over the next 3 years will be promoted to a managerial position. Each published article increases the firm's revenue by $100,000.
The number of articles each can produce depends on how hard they work. Ify is the number of published articles at the end of the third year, then yA = 0.5eA + εA and yD = 0.5eD + eD, where ε represents effort and c is a luck factor over which the researchers have no control. εA and εD are distributed such that (εC - εD) is uniform on [-1/2, 1/2 ]
Let w0 = 0 be the wage each of the two employees gets during the 3 years before the promotion decision, Ir the lifetime income of a manager, and W the lifetime income of the un-promoted employee.
The firm wants to set wages so as to maximize profit. Dan and Ann are willing to engage in the promotion contest if their expected lifetime utility is at least zero.
Calculate the optimal lifetime incomes W+ and W- the firm will promise the two employees. What are the firm's expected profits from hiring Dan and Ann?
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