1. Game Theory
Game 9
Incentive Pay

2. 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

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

4. 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!

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

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

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

8. 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