Question: In a given corporation there are More-Involved and Less-Involved employees. The utility function …

01 May Question: In a given corporation there are More-Involved and Less-Involved employees. The utility function …

Posted at 14:33h in 2Past Paper by Exams

In a given corporation there are More-Involved and Less-Involved employees. The utility function for the first type is f(w,e) -w-2e2, while for the second type it is f(w,e) – w -8e2, where w is the annual wage in thousand zloty and e stands for the average overtime hours per week. The company does not remunerate for overtime but registers the number of such hours. The two types of employees are indistinguishable. In the first year each employee obtains a wage of wo and may take as many hours overtime per week as they would like. After the first year some employees may be promoted. The company wants to promote only the More-Involved. A promotion results in an annual increase of the wage by 200,000 zloty. After the second year i może braćemployees transfer to a new company so the promotion does not matter anymore. Assume that there is no discounting. Indicate all pooling and separating equilibria (i.e. what number of overtime hours in the first year may be a signal of involvement). Provide a detailed reasoning. Which equilibrium will prevail if the company does make use of employees’ overtime?

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