What is the subgame equilibrium of the game

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Reference no: EM133707583

Question: Consider the following workplace situation. A boss can implement an incentive scheme (I) or not (NI). Following observing this a worker can put in High effort (H) or low effort (L). The payoffs are as follows. If I and H are chosen by the boss and worker, respectively, the payoffs are 20 to the boss and 8 to the worker. If I is chosen by the boss, then L by the worker the payoffs are 12 to the boss and 5 to the worker. If the choices are NI then H, the returns are 23 and 7 to the boss and worker respectively. Finally following NI and L the payoffs are 16 (boss) and 9 (worker) a. What is the subgame equilibrium of the game? Explain your answer in the context of the principal- agent incentive contracts. b. Now assume that the worker, through their union workplace agreement has a veto right on any incentive scheme, and there is no incentive scheme currently in place. If the worker agrees to have an incentive scheme the game outline above is played. If the worker does not agree, the subgame following NI is played (that is no incentive scheme can be implemented).

Reference no: EM133707583

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