Game theoryClassroom · multi-user
Design a Contract — Incentives & Effort
Paired up, an Employer designs a pay scheme (fixed wage + profit share) and a Worker chooses how hard to work. See why pay is structured the way it is when effort is hidden.
You’ll learn: See why employers can't simply pay for effort they can't observe, and how the mix of fixed wage and profit share trades off risk-sharing against incentives.
- Principal-agent problem
- Moral hazard / hidden action
- Incentive contracts
- Risk vs. incentives trade-off
Teacher guide
Students will learn to
- Experience both sides of an employment contract: designing pay, and responding to it.
- See how effort responds to the strength of the incentive (the profit share).
- Understand the trade-off between sharing risk and motivating effort under hidden action.
Before the session — ask
- If you couldn't watch how hard your worker tried, how would you pay them?
- As a worker on a flat salary, what's your incentive to work harder than the minimum?
After the session — discuss
- Did higher profit shares lead to higher effort across the pairs?
- Who bore the risk when output depended partly on luck — the employer or the worker?
- Where do real jobs use salary vs. commission vs. equity, and why?
Timing
- Briefing & pairing3–5 min
- Design & effort4–6 min
- Reveal & discussion8–10 min
Run it with your class
Students join with a code or QR — no account needed. Teachers start a session from the dashboard.