The outcome of the state of nature affects the payoff to the agent under a
A)fixed-fee contract.
B)hire contract.
C)contingent contract.
D)All of the above.

Question

Quizplus · Accepted Answer

Contingent contracts are designed to account for uncertainty in the state of nature. The payoff to the agent is dependent on the outcome of the state of nature, providing incentives for the agent to act in a way that maximizes the probability of a favorable outcome. In fixed-fee and hire contracts, the payoff to the agent is not dependent on the outcome of the state of nature, which may lead to less motivation to act in the best interest of the principal.

The Outcome of the State of Nature Affects the Payoff