Presentation is loading. Please wait.

Presentation is loading. Please wait.

Economics 410 Managerial Economics Thursday September 23, 1999.

Similar presentations


Presentation on theme: "Economics 410 Managerial Economics Thursday September 23, 1999."— Presentation transcript:

1 Economics 410 Managerial Economics Thursday September 23, 1999

2 I. Incentive Contracting Game Theory concepts –Asymmetric Information –Moral Hazard –Adverse Selection Economics of Uncertainty Pure Theory of Insurance Preliminaries

3 I. Incentive Contracting “Bounded Rationality” Ideal would be complete contract specifications

4 The Big Issues Effort Ability to Monitor Uncertainty 4 th – Effort/Result

5 Chapter 7 Certainty Equivalent and Risk Premium

6 Certainty Equivalent I U(I)

7 Certainty Equivalent I U(Lottery) where mean is I

8 Certainty Equivalent I Utility of uncertain prospect CE CE +RiskPrem = I RiskPrem = ½ r Var(I)

9 Three Concepts Certainty Equivalent – what certain prospect is equivalent to some lottery Expected Value (Income, for Example) Risk Premium = ½ r Var(I) CE = I – ½ r Var(I) R is the coefficient of absolute risk aversion

10 The Wage Equation W =  +  (e + x +  y) Observed elements ------ z and y Bargain over , ,  Where z = e + x (z might be sales) y might be industry sales

11 Employer Revenue P ( e ) Employee Cost of Effort C ( e )

12 The Wage Equation W =  +  (e + x +  y) Employee’s Certainty Equivalent E(I) – ½ r Var (I)  +  e –C(e) – ½ r  2 Var(x +  y) Employer’s Certainty Equivalent P(e) – (  +  e)

13 The “Incentive Constraint” Employee’s Certainty Equivalent  +  e –C(e) – ½ r  2 Var(x +  y) Maximize the above, choosing e  - C ‘ ( e ) = 0

14 “Informativeness Principle” Reducing “unnecessary variance”

15 Incentive-Intensity Principle

16 The End


Download ppt "Economics 410 Managerial Economics Thursday September 23, 1999."

Similar presentations


Ads by Google