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There are N employees at Yahoo. Employees can either work,<math>e = 1</math>, or shirk, <math>e=0</math>. It costs a worker 1 dollar to work and zero dollars to shirk. Working or not cannot be monitored by the firm. For each unit of work, the firm earns z dollars where 1 < z < N. All workers have an outside option of working at Wendy's across the street and earning zero. Work/shirk decisions are made simultaneously.

1. Suppose that Yahoo is run as a commune. In that case, each worker i is awarded a share <math>s_i > 0</math> of the profits where <math>∑ si \Sigma s_i = 1</math>. How much work will get done at Yahoo under the optimal communal scheme?

2. Carol Bartz, CEO of Yahoo, decides that the commune strategy isn't work- ingworking. She (credibly) threatens to burn some of Yahoo's profits if performance targets are not met. Derive an optimal scheme. (Assume everyone is risk- neutral and pick your favorite equilibrium.) Is this really any better than the commune arrangement?

3. The Board of Directors does not approve of Carol's wasteful money burning scheme. Fortunately, Carol knows that her employees all have CARA preferences with an identical risk-aversion parameter, ρ<math>\rho</math>. She proposes a clever new scheme to get all the Yahoos to work. What is it?