**Practice** Consider a profit-maximizing multinational pharmaceutical company that uses a rare plant to produce expensive drugs. That plant cannot be farmed; it only grows naturally in tropical forests of a poor country, and is hard to find. The company hires local inhabitants search for, and gather, these plants. The amount of plants found depends on worker effort but also luck (there may be no plants in the area they look; or they may be sick on some days andthus less effective at plant gathering, even if they search all day). It is very expensive for the firm to observe worker effort, as that would require hiring additional workers to monitor the plant gatherers, and these workers would have to be well-paid so that they couldn’t be easily bribed. Which of the following statements are correct?(I) If the multinational offers a fixed monthly compensation to the plant gatherers (that is, the same amount of money regardless of how many plants they deliver), that might generate a moral hazard problem.(II) The amount of plant-gathering effort depends only on monetary concerns; non-economic factors like morality and social norms play no role in real labor markets.(III) If the vast majority of plant gatherers do not have good employment alternatives, and the local government does not provide employment protections or worker rights, then it is reasonable to expect that the profit-maximizing multinational will offer excellent job benefits and a fixed monthly compensation to the plant gatherers. a. No statement is correct.b. Only I is correct.c. Only II is correct.d. Only III is correct.e. More than one statement is correct.
**Practice**
Consider a profit-maximizing multinational pharmaceutical company that uses a rare plant to produce expensive drugs. That plant cannot be farmed; it only grows naturally in tropical forests of a poor country, and is hard to find. The company hires local inhabitants search for, and gather, these plants. The amount of plants found depends on worker effort but also luck (there may be no plants in the area they look; or they may be sick on some days and
thus less effective at plant gathering, even if they search all day). It is very expensive for the firm to observe worker effort, as that would require hiring additional workers to monitor the plant gatherers, and these workers would have to be well-paid so that they couldn’t be easily bribed.
Which of the following statements are correct?
(I) If the multinational offers a fixed monthly compensation to the plant gatherers (that is, the same amount of money regardless of how many plants they deliver), that might generate a moral hazard problem.
(II) The amount of plant-gathering effort depends only on monetary concerns; non-economic factors like morality and social norms play no role in real labor markets.
(III) If the vast majority of plant gatherers do not have good employment alternatives, and the local government does not provide employment protections or worker rights, then it is reasonable to expect that the profit-maximizing multinational will offer excellent job benefits and a fixed monthly compensation to the plant gatherers.
a. No statement is correct.
b. Only I is correct.
c. Only II is correct.
d. Only III is correct.
e. More than one statement is correct.
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