* Chapter 1: Problems 2, 3, and 6 * Chapter 2: Problems 1, 5, and 6 * * Chapter 1 *
2. If you decide to pay 1 percent of this amount (in Question 1) as a cash bonus, what performance level (what share price or shareholder value) in the table should trigger the bonus? Suppose you decide to elicit high CEO effort when, and if, medium luck occurs by paying a bonus should the company’s value rise to $800,000,000. What criticism can you see of this incentive contract plan?
Solutions:
We find both contracts elicit lower-thanpredicted levels of effort. Effort choices elicited by the option contract do not differ significantly from effort choices elicited by the stock contract except for male subjects whose…show more content… Equation [2.2] is the supply function: QS = f(P, PI, PUI, T, EE, F, RC, PE, T/S, …). P is price, PI is inputs like metal, PUI is the price of unused inputs like fiberglass, T is technological improvement like robots; EE is exit or entry of other automakers, RC
