CEO Incentives and Corporate Strategy

Socially Optimal Level of Care

Agent's Privately Optimal Level of Care

Comparison of Socially Optimal vs. Privately Optimal Care

Principal's Response to Suboptimal Agent Care

Salesperson Effort and Commission Structure

A freelance software developer is hired by a client to build an application. The developer is paid a fixed fee for the project, regardless of the final quality. The developer's extra effort (e.g., more rigorous testing, code optimization) increases the long-term value of the application for the client, but this extra effort is personally costly for the developer in terms of time and energy. Why is the developer likely to choose a level of effort that is less than what would be best for the client and developer combined?

A country implements a new economic policy that results in a 15% increase in the average income for the poorest 10% of its population. During the same period, the average income for the wealthiest 10% of the population remains unchanged. How would this change affect the country's rich/poor ratio, which is used as a measure of internal income inequality?

Tenant's Upkeep of a Rented Apartment

An individual buys fire insurance for their home. They can take costly precautions (e.g., installing better smoke detectors) to reduce the risk of a fire. This benefits both the homeowner (by protecting their property) and the insurance company (by reducing the likelihood of a payout). Match each component of this situation to its correct economic description.

A beekeeper is paid a fixed fee to place hives next to an apple orchard, which increases the orchard's fruit yield through pollination. The beekeeper can undertake a costly action—purchasing more productive but more expensive queen bees—which would further increase the orchard's yield. True or False: Because this action increases the total value created, the beekeeper has a sufficient incentive to purchase the more expensive queen bees.

Restaurant Profitability and Manager Effort

A team of two programmers is working on a project. Their final bonus is based on the total profit from the project, which is split equally between them. The profit depends on the combined effort of both programmers. Each programmer individually decides how much effort to put in, which is personally costly in terms of time and energy. Which of the following best explains why the total effort exerted by the team is likely to be less than the level that would maximize their combined bonus?

Legal Contingency Fees and Effort Allocation