To induce an agent to work hard,a principal may offer the agent a bonus,in other words,an extra payment if a performance target is hit.Suppose that the agent's performance is affected by factors beyond the agent's control,for example umbrellas are demanded more on a rainy day.Under what conditions may the bonus not induce the agent to work harder?
A) The agent is very risk averse.
B) The agent is very risk loving.
C) The agent is risk neutral.
D) The principal is risk neutral.

Question

Quizplus · Accepted Answer

A risk-averse agent may not be induced to work harder because the uncertainty of the factors beyond their control may outweigh the potential gain from the bonus. They may prefer a guaranteed payment over the possibility of earning extra money through the bonus.

To Induce an Agent to Work Hard,a Principal May Offer