a) What is the minimum level of the wage for which an old worker will choose to work at this firm and will exert high effort? Interpret your result.
a) What is the minimum level of the wage for which an old worker will choose to work at this firm and will exert high effort? Interpret your result.
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.7P
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Transcribed Image Text:Consider a worker who works for at most two periods (say, when young and when old) at a
particular firm. Each period, the worker can choose between exerting high effort and exerting
low effort. The worker's cost of exerting high effort are
Cy
when
young
and
Co
when old. The
worker's cost of exerting low effort are zero. The effort of the worker is difficult to observe
by the firm. With probability T, the firm observes the worker's effort at the end of a period.
With the remaining probability, the firm does not observe the worker's effort. The firm can
only fire the worker when it observed that the worker has shirked. In that case, the firm is also
allowed to withhold the worker's wage for the period in which the worker was caught
shirking. When exerting high effort, the worker's productivity is q, when young and q, when
old. When exerting low effort, the worker's productivity is zero. The worker's value of
alternative job opportunities is
when young and v, when old. For simplicity, the discount
rate is assumed to be zero.
a) What is the minimum level of the wage for which an old worker will choose to work at this
firm and will exert high effort? Interpret your result.
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