I have a problem. I’d like to get the next door neighbour’s teenager to mow our lawn. But I’m not sure whether to pay him a flat fee or an hourly rate (mowing the lawn takes me about an hour). Clearly, the standard optimal contracting issues arise – a piece rate leads to lower quality, while an hourly rate leads to shirking. So if renegotiation was costless, I’d just try both options.* But when you’re dealing with your neighbour’s child, there’s a renegotiation cost, which means I probably need to lock into one type of contract from the outset. So tell me, dear readers, which do you think is a better option? And what is the going rate these days for an hour’s lawnmowing by a 13 year old?
* And perhaps I’ll do this one day – an Adelaide economist friend of mine once put it, "experimenting on your children can be fun".