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Find the optimal incentive-compatible contract

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The Continuing Saga of VooDoo Records: everything is the same as in the previous question, except that the utility function of the band is now U (y, e) = y - e.

(a) What is the full-information contract? Provide an intuitive explanation for your results.

(b) Suppose that your friend cannot observe the effort level of the band. Explain why the full- information contract is not incentive compatible.

(c) Find the optimal incentive-compatible contract. Provide an intuitive explanation for your results.

(d) What is the expected income of your friend under full and asymmetric information? Why is she no worse off under asymmetric information?

Reference no: EM13876352

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