If the principal has full information,production efficiency without supervision can occur with
A) a fixed fee rental contract.
B) a profit-sharing contract.
C) an incentive-compatible contract.
D) All of the above.

Question

Quizplus · Accepted Answer

Production efficiency without supervision can occur with all the mentioned contracts if the principal has full information. A fixed fee rental contract can ensure efficiency by transferring operational decisions to the agent, who then has the incentive to be efficient to maximize their own profit. A profit-sharing contract aligns the interests of the principal and the agent by giving both parties a stake in the profitability of the venture, encouraging efficient production. An incentive-compatible contract is designed specifically to ensure that the agent's incentives are aligned with the principal's objectives, promoting efficiency even in the absence of supervision.

If the Principal Has Full Information,production Efficiency Without Supervision Can