Game Theory Game 9 Incentive Pay

Example Justin V: f = 0, b = $200 K Idea: if you work hard, earn $160 K (80% chance at $200 K) Profit = $160 K - $150 K = $10 K BUT: what if don’t work hard? (60%) $200 K = $120 K Profit = $120 K - $100 K = $20 K

Routine Effort f=100 is all you need! Bella f=100, b=1 Profit = 259

Profitability Summary Greatest Profit from inducing high effort: $280K (unless using negative fixed) Greatest Profit from inducing low effort: $260K Using Fixed payment = $100K, no bonus The “no brainer” solution No one did better than this !!! Do we want to induce high effort? Carefully. Don’t give away the farm trying!

Who Gave Away the Farm? Rosauri Did not entice high effort Bonus = 80 Seriously Overspent Fixed payment = 250 EXPECTED PROFIT = 62

Who Gave Away the Farm? Alex Did entice high effort Bonus = 450 Seriously Overspent Fixed payment = 100 EXPECTED PROFIT = 20

Who Did Not Entice Participation? Tyler C. f = 50, b = 75 50+(0.6)75 = 95 < 100 50+(0.8)75 = 110 < 150 Also Martin, Kayla, Christian, Divine

Who Gave Away the Farm? (and the animals, the barn, …) Dan f = 550 b = 50 The firm was VERY HAPPY to take this project (at low effort) Resulting profit for subcontractor: $580 Resulting profit for you: - $220