Labor is a crucial input in silvicultural invest-
ments, but the firm does not have direct control
. . over the effort e and the diligence q with
which hired labor performs its task }the quan-
tity and quality aspects, respectively. The firm has
. direct control over 1 the number of workers
. hired; 2 the level of supervision that can per-
.. haps affect e and q ; and 3 the method for
paying workers. Most principal-agent models fo-
. . . cus on 1 and 2 , neglecting 3 entirely. For
. example, Alchian and Demsetz 1972 consider
both shirking by workers and by their supervisor;
only if the supervisor can capture the residual
value of labor’s output does the supervisor have
the least incentive to shirk. Roumasset and Uy
.1980 use a constrained optimization model, with
firms maximizing expected profit by choosing the
number of workers and level of supervision, sub-
ject to the choice by workers to maximize utility
as a function of effort and diligence see also
.
Laffont, 1989 . Supervision enters the constraint
. since both effort the quantity aspect and dili-
. gence the quality aspect are assumed to be
.
1
concave functions of the level of supervision S .