5. Consider A Team Of Three Workers. Total Output, O, Is Given By O

5. Consider a team of three workers. Total output, O, is given by O = 10e1 12 e2 4e3, where ei is the effort level of worker 1, 2, or 3. The effort costs of each worker are given by ei². (a) What is the first best level of effort for each worker? (b) Now suppose that each worker’s effort level cannot be verified by a court. The firm has to distribute all of the output to the worker (ie 0-w1-w2 – w3 = 0). First, the firm implements the sharing rules that each worker gets one third of total output. What will be the effort levels of each worker in this case? How does your answer differ from your answer in (a) and why? (c) What about the sharing rule when worker 1 gets 10/26 of the output, worker 2 gets 12/26 of the output and worker 3 gets 4/26 of the total output? If this rule does not get the first best, suggest one that does? (d) How can this team overcome this moral hazard in teams problem?

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5. Consider a team of three workers. Total output, O, is given by O=10el 12e 4e, where ei is the effort level of worker 1,2 , or 3 . The effort costs of each worker are given by ei?. (a) What is the first best level of effort for each worker? (b) Now suppose that each worker’s effort level cannot be verified by a court. The firm has to distribute all of the output to the worker (ie O−w1−w2−w3=0 ). First, the firm implements the sharing rules that each worker gets one third of total output. What will be the effort levels of each worker in this case? How does your answer differ from your answer in (a) and why? (c) What about the sharing rule when worker 1 gets 10/26 of the output, worker 2 gets 12/26 of the output and worker 3 gets 4/26 of the total output? If this rule does not get the first best, suggest one that does? (d) How can this team overcome this moral hazard in teams problem?

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