Return to the situation with the manager from the previous question.Now assume that shareholders cannot observe effort,so cannot specify how hard the manager 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 55% share of the gross profits provides a strong incentive for the manager to work hard, aligning their interests with those of the shareholders, while still leaving a substantial portion of profits for the shareholders.

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