Question 4. A workplace has a boss and a worker. Assume that a worker can choose to work hard or not. The worker receives a wage of w. Working requires an effort that corresponds to a lowering the wage by e. The payoff to the boss is R if the worker works hard and r if he does not, where r < R. The boss can choose to monitor the worker to check if he is working or not. Monitoring costs c> 0 for the boss, so she would prefer not to do it. If the worker is caught not working, he is fired and gets a wage of 0. a) What does the payoff matrix look like in this monitoring game? b) What can you say about the equilibrium of this game? c) If the boss was given a reward b if she finds the worker shirking, will this change the equilibrium actions in the game?

Question 4. A workplace has a boss and a worker. Assume that a worker can choose to work hard or not. The worker receives a wage of w. Working requires an effort that corresponds to a lowering the wage by e. The payoff to the boss is R if the worker works hard and r if he does not, where r < R. The boss can choose to monitor the worker to check if he is working or not. Monitoring costs c> 0 for the boss, so she would prefer not to do it. If the worker is caught not working, he is fired and gets a wage of 0. a) What does the payoff matrix look like in this monitoring game? b) What can you say about the equilibrium of this game? c) If the boss was given a reward b if she finds the worker shirking, will this change the equilibrium actions in the game?

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter8: Market Failure

Section: Chapter Questions

Problem 9P

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