To induce an agent to work hard, a principal may offer the agent a bonus, in other words, an extra payment if a performance target is hit. Suppose that the agent's performance is affected by factors beyond the agent's control, for example umbrellas are demanded more on a rainy day. Under what conditions may the bonus not induce the agent to work harder?
A) The agent is very risk averse.
B) The agent is very risk loving.
C) The agent is risk neutral.
D) The principal is risk neutral.
Question 2
A good salesperson can sell 500,000 worth of goods, while a poor one can sell only 100,000 worth of goods. Job applicants know if they are good or bad, but the firm does not. A firm will offer job applicants a choice between a fixed salary of 10,000 or a 10 commission. Assuming risk-neutral salespersons and no opportunistic behavior, can the firm determine a prospective good salesperson from a poor one?
A) Yes, because a poor salesperson will always choose the fixed salary.
B) Yes, because a good salesperson will always choose the fixed salary.
C) No, because a poor salesperson is indifferent between the two contracts.
D) No, because a good salesperson is indifferent between the two contracts.
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