Reference no: EM133328236

Question 1. During the Pandemic, both Trump Administration and Biden Administration sent the stimulus checks to people. While these checks may help the people in need, it can also cause other problems. Explain the possible moral hazard problems and adverse selection problems related to these stimulus checks.

Question 2. Efficiency Wage Theory vs. Moral Hazard in Teams

When workers' compensation depends on the team effort, it is possible that some works may choose to be the free riders, or to shirk. At the same time, efficiency wage theory or model, as practiced by Henry Ford, suggests that if the employer can sufficiently reward the workers, it is possible to lessen or eliminate the shirking problem in a team. Here, we are using a simple two-player game to test the theory.

Assume that there are two workers, worker 1 and worker 2, in a team. Worker 1 can choose the effort level E1 = 1 (working hard) or E1 = 0 (shirking). Worker 2 can also choose E2 = 1 or E2 = 0. The reward to each worker is 2(E1 + E2). That is, each player or worker has two strategies - to work hard (with E =1) or to shirk (with E = 0). If a worker chooses to work hard, there is a cost of working hard, C = 3. If a worker chooses to shirk, C = 0. Therefore, the payoff of each player or worker is 2(E1 + E2) - C. Describe and explain the chosen strategy of each player at the Nash equilibrium.

Now suppose the employer raises the reward to each player to 4(E1 + E2). The payoff of each player or worker will become 4(E1 + E2) - C. Describe and explain what strategy each player will choose at the Nash equilibrium.

Does the efficiency wage model solve the moral hazard problem in teams?