In the presence of asymmetric information, a piece-rate contract
A)is not as good as a contract based on commissions.
B)can lead to agents producing more output than would occur under a fixed-rent-paid-to-the-principal contract.
C)is impossible to write.
D)will result in the principal earning all of the profit.

Question

Quizplus · Accepted Answer

A piece-rate contract incentivizes agents to work faster and produce more output, which can lead to higher profits for the principal. This is especially true in situations where the agent has more information about their productivity levels than the principal. However, commission-based contracts may be better when quality is a concern, as piece-rate contracts may incentivize agents to sacrifice quality for quantity. Option C is incorrect as it is possible to write a piece-rate contract. Option A is incorrect as the effectiveness of a commission-based contract depends on the specific circumstances. Option D is incorrect as the principal only earns the profit after deducting the agent's compensation.

In the Presence of Asymmetric Information, a Piece-Rate Contract