Suppose first that the low-value non-work activity does not exist and that the high-value non-work activity exists with a probability 0.10 (Interpretation: There is a 10 percent chance that the employee will need to perform an important child-care duty each day.)

Consider a potential employee who values wages but also values the opportunity to pursue non-work related activities. (You may think of these activities as relating to family obligations, such as child care.) Suppose that other jobs available to this employee pay $100 per day, but require him to work at the company’s facility, effectively eliminating his ability to pursue non-work activities. Ignore “effort” for the purpose of this problem and assume that the only agency problem pertains to how the employee allocates his time. Suppose that if the employee allocates all of his time in a day to “work,” he creates $150 worth of value (gross of wages) for the firm. The employee may also have access to two forms of “non-work” activities: (1) a high-value non-work activity (think unexpected child care needs) and (2) a low-value non-work activity (think of leisure – playing video games or watching TV). The employee values the ability to complete the high-value non-work activity at $200 and the ability to complete the low-value non-work activity at $50.

a) Suppose first that the low-value non-work activity does not exist and that the high-value non-work activity exists with a probability 0.10 (Interpretation: There is a 10 percent chance that the employee will need to perform an important child-care duty each day.) Suppose that your firm is considering offering this employee a telecommuting job. Assume here that if the employee telecommutes and the high-value activity arises, he spends all his time on this activity and creates no value for the firm that day. If the high-value non-work activity does not arise, he spends all his time working on behalf of the firm. What daily wage should you offer? What will your profits be? Is your firm better off than if it offered the employee a non-telecommuting job? Why?

b) Suppose now that the low-value non-work activity does exist. Unlike the high-value activity (which only arises with some probability), the low-value activity is always present. Suppose also that the firm cannot pay this employee based on individual performance because the available performance measures are of insufficient quality. Suppose that your firm offers the telecommuting job described in part (a). According to the multitask principle, how will the employee spend his time? Are your profits higher offering the telecommuting job or the non-telecommuting job?

c) Now suppose that the firm does have access to a good measure of individual performance. It can make pay contingent on whether the employee works on the firm’s activity. Which job (telecommuting or non-telecommuting) and compensation arrangement (fixed, or fixed plus some variable dependent on output) will maximize the firm’s profits? Comment on the types of jobs in which one might expect to see firms offer telecommuting.

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