Two workers are in a team. Each worker can either work Hard or Easy. The effort cost of working Hard is 3; the effort cost of working Easy is 0. If both workers work Easy, total output is 12. If both workers work Hard output is 20. If one worker puts in Easy and the other Hard output is 16.
The profit sharing rule is as follows: each worker gets ½ of the total output. A worker's net payoff is then their share of output minus their effort cost.
a. What is the Nash equilibrium of the game? Interpret the result.
b. What are the ways the team (or a principal acting on their behalf) can get a better outcome?
c. A device becomes available that can measure the effort of a given worker for a cost of $1. Outline the minimum cost way of achieving the first-best outcome.