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An uncertain wage contract model for risk-averse worker under bilateral moral hazard

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  • This paper investigates a wage mechanism design problem faced by a risk neutral firm (he) who employs a risk averse worker (she) to sell products for him. The effort levels of both the firm and the worker are unobservable to each other, which results in bilateral moral hazard. The firm offers a wage contract menu to the worker with the objective of maximizing his expected profit. The results show that the firm will provide the same wage contract to the worker when the worker's effort is observable regardless of the market condition being full or private information. The optimal wage contract is related to the worker's risk averse level when the bilateral moral hazard exists. The information values of the worker's effort and the market condition are studied, respectively. The results show that the firm benefits from the worker's observable effort under full information and only when the sales uncertainty is sufficiently low, can the firm profit from that under private information. Moreover, only if the cost coefficient of the firm's effort is sufficiently high, the firm can benefit from full information in the scenario when the worker's effort is unobservable.

    Mathematics Subject Classification: Primary: 91B40, 91A40; Secondary: 91A80.

    Citation:

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  • Figure 1.  Optimal bonus coefficient of the wage

    Figure 2.  Optimal effort of the firm

    Figure 3.  Optimal effort of the worker

    Figure 4.  Impact of the worker's risk adverse level on VE1 and VE2

    Figure 5.  Impact of the worker's risk adverse level on VM1 and VM2

    Table 1.  The four information cases

    $X$ known $X$ unknown
    The worker's observable effortCase $\rm{OF}$Case $\rm{OP}$
    The worker's unobservable effortCase $\rm{UF}$Case $\rm{UP}$
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