I disagree, and that’s my central issue with the post.
“So that is the irony of the situation: An optimal contract punishes you for bad luck, and for nothing else.”
The post gets this exactly backwards—the optimal contract exactly balances punishing lack of effort and bad luck, in a way that the employer is willing to pay as much as the market dictates for that effort under the uncertainty that exists.
Maybe I will have to edit the text to make that clearer, but: the optimal contract in the situation I described (moral hazard with binary states and effort levels) punishes only for bad luck, exactly because it makes the worker choose high effort. In this sense, once revenue is known, you also know that it is not the worker’s fault that revenue is low. From an ex-ante perspective, it offers conditional wages that “would” punish for being lazy, however.
You’re right—but the basic literature on principle agent dynamics corrects this simple model to properly account for non-binary effort and luck, and I think that is the better model for looking at luck and effort.
I disagree, and that’s my central issue with the post.
The post gets this exactly backwards—the optimal contract exactly balances punishing lack of effort and bad luck, in a way that the employer is willing to pay as much as the market dictates for that effort under the uncertainty that exists.
Maybe I will have to edit the text to make that clearer, but: the optimal contract in the situation I described (moral hazard with binary states and effort levels) punishes only for bad luck, exactly because it makes the worker choose high effort. In this sense, once revenue is known, you also know that it is not the worker’s fault that revenue is low. From an ex-ante perspective, it offers conditional wages that “would” punish for being lazy, however.
You’re right—but the basic literature on principle agent dynamics corrects this simple model to properly account for non-binary effort and luck, and I think that is the better model for looking at luck and effort.