Question

You are about to start working at car dealership that is currently reporting losses due to flooding but will be profitable in a few years. Assume you’re your risk adverse and your supervisor cannot fully monitor your actions. The key metrics at this dealership include both financial data (number of sales, margin on sales) as well as qualitative data (survey of experience). You are tasked with designing a compensation contract.

1.Define moral hazard and adverse-selection. Describe how the firm may want to establish a compensation contract for you given moral hazard and adverse selection issues.

2.Does this change depending on your level of risk aversion?

3.Discuss both tax and nontax factors from both the employee and employers perspective.

4. Create a compensation contract.