Economics is about the creation of value through markets, organizations and other institutions. Asymmetric information and bounded rationality may get in the way of value creation. This course presents a number of insights from contract theory for dealing with these twin problems. It starts with moral hazard and adverse selection in elementary settings, then it turns to multidimensional incentive problems, contracts for teams, relational contracts, incomplete contracts, decision rights and authority, and asset ownership. It also includes a discussion of cheap talk and communication. These topics are approached by applying contract theory to problems in labour economics, organizational economics, and corporate finance.
Various excellent text books on contract theory exist The course will be based on the book by Bolton and Dewatripont [BD] and selected articles.
- Bolton, Patrick and Mathias Dewatripont, 2005, Contract Theory. The MIT Press, Cambridge, Mass [BD].
- The solutions to selected exercises can be found in the Solutions Manual to Accompany Contract Theory, by Campbell, Cohen, Ederer and Spinnewijn.
- Laffont, Jean-Jacques and David Martimort, 2002, The Theory of Incentives. The Principal-Agent Model. Princeton University Press.
- Salanié, Bernard, 2005, The Economics of Contracts. A Primer. 2nd edition, The MIT Press, Cambridge.