suppose that shareholders are risk neutral.

their objective function is equal to the

expected gross profit of the firm minus the expected wage payment. for ease of
exposition, assume that there is a unique manager. this manager makes an
unobservable decision e in a an interval . this decision will be interpreted as an
effort level, but more generally it could be any discretionary or moral hazard
variable; it is not observable by the shareholder. given e, the realization of the profit
depends on the realization of a random variable