The problem of production in multi-plant firms with asymmetric information can be solved by paying the manager:
A) a piece rate, some constant amount per unit of output produced.
B) a larger amount for each unit than was paid for the previous unit, to reflect increasing marginal cost.
C) a smaller amount for each unit than was paid for the previous unit, to reflect decreasing marginal revenue.
D) an annual bonus that increases with each unit of output up to capacity, and decreases with each unit of output past capacity.
E) an annual bonus that is calculated decreases with each unit of output up to capacity, and increases with each unit of output past capacity.

Question

Quizplus · Accepted Answer

The correct approach to solving the problem of production in multi-plant firms with asymmetric information involves incentivizing managers in a way that aligns their interests with those of the firm. Option D, offering an annual bonus that increases with each unit of output up to capacity and decreases with each unit of output past capacity, effectively encourages managers to optimize production levels. This method incentivizes managers to produce up to the firm's capacity, maximizing efficiency and profitability, while discouraging overproduction that could lead to inefficiencies or increased costs.

The Problem of Production in Multi-Plant Firms with Asymmetric Information