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[Music] in our last video we started working with a moral hazard problem looking at how to design the optimal contract and in that first video we looked at an overview of the problem and then solve the problem in the case where we could observe the effort of the agent in this video we look at the last part of the problem where we solve for the optimal contract when we cant observe the effort of the agent Ill put a link to that first video in the description of this video below now lets look at the more complicated case where effort is not observable so this is really where the moral hazard problem comes in when the principal cant tell whether their employee is providing high effort or low effort what were going to have to do here since we cant observe the effort we can only observe the output were going to want to set up a wage structure where since effort is correlated but not perfectly related to output were going to have to reward this person with a higher wage for higher ou
