Suppose an employer has monitoring devices established so that the probability of an employee being caught while shirking is 0.2. If the gain to the employee from shirking is $1,000, how large a bond will deter shirking?
What will be an ideal response?
B = 1000/0.2 = $5,000. With a $5,000 bond and a 20% chance of being caught, the employee's gain from shirking just equals the expected cost of shirking.
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