In the presence of asymmetric information,a piece-rate contract
A) achieves production efficiency.
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

In the presence of asymmetric information, a piece-rate contract can incentivize agents to produce more output than they would under a fixed-rent-paid-to-the-principal contract, as the agents are motivated to increase their earnings. This may lead to higher production efficiency, but it is also possible that the agents may cut corners or sacrifice quality to increase their output. The option of a fixed-rent-paid-to-the-principal contract may not be optimal because it does not incentivize the agents to produce more efficiently.

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