Suppose that a publisher is considering how to pay an author for writing a book. The publisher would like the author to put forth his maximum effort, but the publisher is unable to observe the author's effort.
a. In this example, who is the principal and who is the agent?
b. What is the moral hazard in paying an author a fixed fee for writing a book? Is there an alternative way of paying the author that would lead to greater effort?

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The Answer of Suppose that a publisher is considering how to pay an author for writing a book. The publisher would like the author to put forth his maximum effort, but the publisher is unable to observe the author's effort.
a. In this example, who is the principal and who is the agent?
b. What is the moral hazard in paying an author a fixed fee for writing a book? Is there an alternative way of paying the author that would lead to greater effort?

Suppose That a Publisher Is Considering How to Pay an Author