Suppose an employer has monitoring devices established so that the pro

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?

ANSWER

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.