Overview: Incentives & employment
• Case discussion : 'Outsourcing Sales'
• Specialization & Comparative Advantage
• Principal-Agent Problems
– Pay for performance
– Promotion Tournaments
• Moral Hazard
Set-up : “Outsourcing Sales?”
• TV station considers outsourcing sales
• Sales company asks variable compensation:
– 10% on first $400 million
– 5% on part between $400 and $600 million
– 2% on sales above $600 million
• Sales costs are all variable
• TV Station has
– $500 million advertising revenue
– $450 million fixed costs
– $50 million variable cost from sales
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