The economics of contracts: Aligning incentives

a. The bilateral monopoly problem

    I take you up to Alaska on my boat to help me harvest salmon.
    We get to our remote fishing location and proceed to work out the wage.

Estimated values     Quantity hired Wage   competition 10.5 $16.50 (1) monopoly seller's optimum     (2) monopsony buyer's optimnum         SL: W = 6 + L     DL: W = 48 - 3L

b. The principal-agent problem

Ex: Investor-broker:
    Investor (principal):
        Earns 4% on savings
    Investment broker (agent):
        Promises investor a minimum 10% return on $100 investment for one year
        Broker charges 20% of the total return as a fee for services

For the broker's options below:
    Perform => broker invests on behalf of the principal investor and earns a 10% return
    Breach => broker runs off and spends the investment funds

Case 1: No enforceable contract:

Case 2: Enforceable contract: