You are about to start working at car dealership that iscurrently reporting losses due to flooding but will be profitablein a few years. Assume you’re your risk adverse and your supervisorcannot fully monitor your actions. The key metrics at thisdealership include both financial data (number of sales, margin onsales) as well as qualitative data (survey of experience). You aretasked with designing a compensation contract.
1. Define in your own terms moral hazard and adverse-selectionDescribe how the firm may want to establish a compensation contractfor you given moral hazard and adverse selection issues.
2. Does this change depending on your level of riskaversion?
3. Discuss both tax and nontax factors from both the employeeand employers perspective.
4. Suppose a firm has a tax loss in the current period of $200,which when added to prior tax losses gives it an NOL carryforwardof $300. The top statutory tax rate is 21%. Assume an after-taxdiscount rate of 10% and future taxable income of $50 per year.What is the firm’s marginal explicit tax rate?
5. Create the compensation contract with points 1-4 in mind.Keep this contract to a single page. You will be graded oncreativity, presentation, and writing clarity.
