A firm wants to hire a project manager (PM) at a salary of $100,000. 30% of PMs have high ability, and 70% of PMs have low ability. High ability PMs generate $120,000 in revenue and low ability PMs generate $80,000 in revenue. In addition to differences in productivity, high and low ability PMs have different outside offers. If a high ability PM is not hired by the firm, she can work for another company at a salary of $80,000.
If the low ability PM is not hired by the firm, she can work for another company for $70,000. High ability PMs are also able to get a Project Management Professional (PMP) certification at a cost of $1,000. Low ability PMs are unable to get a PMP certification (they would fail the test). The firm is not able to observe a PM’s ability, but is able to observe and verify whether or not the PM has a PMP certificate.
(1) What would the extensive form of the game look like?
(2) Why would no one be hired in PBNE if there was no certification process?