In Solved Problem 20.3, a firm calculated the optimal level of monitoring to prevent stealing. If G = $500 and θ = 20%, what is the minimum bond that deters stealing?
Solved Problem 20.3
Workers post bonds of B that are forfeited if they are caught stealing (but no other punishment is imposed). Each extra unit of monitoring, M, raises the probability that a firm catches a worker who steals θ by 5%. A unit of M costs $10. A worker can steal a piece of equipment and resell it for its full value of G dollars. What is the optimal M that the firm uses if it believes that workers are risk neutral? In particular, if B = $5,000 and G = $500, what is the optimal M?