Return to the situation with the executive from the previous question. Now assume that shareholders cannot observe effort,so cannot specify how hard the executive works in the contract but must induce it through the incentive scheme. Which of the following wage contracts would work out best for shareholders in equilibrium?
A)A flat wage w = 2,500 with no profit share.
B)A share of 35% of the gross profits.
C)A share of 55% of the gross profits.
D)A share of 70% of the gross profits.

Question

Quizplus · Accepted Answer

A share of 55% of the gross profits provides a strong enough incentive for the executive to exert effort while still leaving a significant portion of profits for the shareholders, balancing motivation and shareholder returns.

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