Suppose the principal offers to share a percentage of the profit with the agent.Such a contract
A) will yield the same income for the agent as a hire contract would.
B) is incentive compatible.
C) creates a production inefficiency.
D) would not be acceptable to any agent.

Question

Quizplus · Accepted Answer

A contract that offers to share the profits with the agent creates an incentive for the agent to work harder and be more productive, leading to higher profits and a higher percentage for the agent. This makes it an incentive compatible contract. However, it may also create a production inefficiency if the agent focuses solely on maximizing profits rather than other factors like quality or customer satisfaction. So, option B would be the best choice. Option A is incorrect because the income earned by the agent will depend on the profits generated, which can be higher or lower than a flat rate hire contract. Option D is incorrect because the contract can be acceptable to an agent if the percentage offered is attractive enough.

Suppose the Principal Offers to Share a Percentage of the Profit