You are the manager of a company that owns several golf courses in different countries
all over the world. You run one golf course yourself in Toronto, and employ a number of
workers to run the other golf courses. You provide each of your employees with supplies for
running the golf course (like grass seed, golf carts, and other things needed to maintain the
course), and pay them according to the following formula:
Income = a + b(Golf Course Revenues) (1)
where “Golf Course Revenues” represents the total revenue (in dollars) a worker creates at a golf
course in a given week; you will determine the value of the parameters “a” and “b”. Since you
are running a golf course yourself, direct oversight of all your workers at the other courses is
impossible, so their effort is not directly observable for you; however, you will be able to
observe the revenues they generate at their own courses. Furthermore, a worker’s effort
determines the amount of revenues generated by the course they run. Lastly, the courses are
dedicated to preserving a natural setting, so no electronic devices (like cameras or cell phones)
are permitted anywhere on their properties.
Your goal is to use this contract to encourage your workers to use the Socially Efficient
level of effort; using the theories you’ve learned in class, you will need to discuss your contract’s
ability to induce your workers to choose the Socially Efficient level of effort given the issues that
are described on the following page.
1. You are considering three types of contracts for your employees:
(i) a = 0 and b = 0.75
(ii) a < 0 and b = 1
(iii) a < 0 and b = 2
Explain how the worker’s choice of effort will compare in the three cases, and discuss the
relative values of the sum of profits and utility in the three cases.
2. Suppose that demand for golf on one of your company’s courses depends on various
factors. Consider two such issues:
(i) A course in Ireland reports that its demand for golf depends on how Irish golfer Rory
McIlroy fares in a given week. If Rory places in the top ten in a given week’s PGA
tournament, then golf’s popularity surges, and in that week, fifty extra rounds are
played at the local golf course. However, if Rory does not place in the top ten in a
given week’s PGA tournament, then golf’s popularity wanes, and in that week, fifty
fewer rounds are played at the local golf course. In any given week, Rory has a 50%
chance of placing in the top ten of a tournament.
(ii) A course in France reports that a private social club can cause its demand for golf to
change a lot. Each week, the social club meets to determine which athletic activity it
will take up in a given week: tennis or golf. Half of the time, the club will choose
tennis, and the other half of the time, it will choose golf. When the club members
choose to play golf, an extra 60 rounds are played that week at the local golf course.
But when the club members choose to play tennis, 60 fewer rounds are played that
week at the local golf course. Furthermore, members of the club do not speak with
non-members about any discussions conducted at the social club.
In both case (i) and case (ii), discuss the ability of your contract to elicit the Socially Efficient
level of effort from your employees in Ireland and France.
3. Suppose a golf course in Vancouver has been running without any problems, and the
worker who runs the course has been offered a contract that induces her to choose the Socially
Efficient level of effort. But suppose that a change occurs at the course: once every 10 weeks, an
organized gang who pose as golfers will rob the course so that it has no revenues that week. In
this case, discuss circumstances under which a new contract: (i) could still elicit the Socially
Efficient level of effort, and (ii) could no longer could elicit the Socially Efficient level of effort.
Also, discuss how the values of (a, b) would compare in both (i) and (ii) before and after the
gang started to rob the golf course.
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