Basics of linear model Return to Example 15.

 Basics of linear model

Return to Example 15.2, but now assume the second variable has a variance of _σ2 = 5, 000. Determine an optimal (linear) contract.

Explain the difference between this contract and that in the original setting

1. Basics of linear model

Return again to Example 15.2. Recall that with equal variances and independence this can be interpreted as random sampling the manager’s performance. Let n be the size of the sample. Example 15.1 has n = 1, while Example 15.2 has n = 2. Determine an optimal contract for the n = 3, 4 and 5 cases. Write a short paragraph explaining your finding.