The
course is intended to cover recent developments in economics of information
and organization. First, we shall study basic adverse selection and
moral hazard models, then extend the analysis to multi-dimensional and
multi-agent environments. Then we shall study the dynamics of complete
contracts. The last part covers incomplete contract theory.
There
are no prerequisites except the advanced course of Microeconomic Theory
including the mechanism design theory.
There
will be three problem sets and a final exam. The problem sets will contribute
30% to the course grade.
General
references
There
is no comprehensive contract theory textbook. The first part is to some
extent covered by the references 1-3 below. For the second part, the
students shall mostly rely on the list of required readings, though
references 4-6 are also very helpful.
Salanie, Bernard.
The Economics of Contracts: A Primer. MIT Press 1997.
Hart, Oliver
and Bengt Holmstrom. The Theory of Contracts. In Advances in
Economic Theory, Fifth World Congress, ed. by Truman Bewley.
Cambridge University Press, 1987.
Mas-Colell,
A., M. Whinston, and J. Green. The Microeconomic Theory.
Chapters 13,14.
Holmstrom,
Bengt and Jean Tirole. The Theory of the Firm. In Handbook of
Industrial Organization. Ed. by R. Schmalensee and R.Willig.
NY: Elsevier, 1989.
Williamson,
Oliver. The Economic Institutions of Capitalism. NY: Free
Press, 1985.
Hart, Oliver.
Firms, Contracts and Financial Structure. Oxford University
Press, 1995.
Syllabus:
lectures and references
1-3. Adverse
selection: screening. Models with discrete and continuous types.
Application to insurance markets and credit rationing.
1, ch. 3
3, ch. 13-14
4.
Adverse selection: signaling. General theory. Equilibrium selection.
Application to education.
1, ch. 4
3, ch. 13-14
5-7.
Moral hazard. Models with discrete and continuous choice of
actiones. The sufficient statistic theorem. The incentive-insurance
tradeoff. Models with liquidity-constrained agents. Applicability
of the irst-order approach. Linear contracts and aggregation.
1, ch. 5
2
3, ch. 14
8-9.
Extensions: muldidimensional asymmetric information, multi-tasking,
common agency, moral hazard in teams.
W.Adams
and J.Yellen (1976) Commodity bundling and the burden of monopoly.
Quarterly Journal of Economics 90: 475-498.
Mark Armstrong
(1997) Multiproduct nonlinear pricing. Econometrica 64(1):
51-76.
B.Holmstrom
and P.Milgrom (1991) Multitask principal-agent analysis: Incentive
contracts, asset ownership and job design. Journal of Law,
Economics and Organization 7: 24-51.
10-11.
Dynamics of complete contracts. Dynamics of adverse selection.
Dynamics of moral hazard. Renegotiation. Commitment. Ratchet effect.
Career concerns.
1, ch. 6
B. Holmstrom.
(1982) A dynamic model of managerial incentives … (Reprinted
in Review of Economic Studies, 1991, No. 1)
S.Grossman
and O.Hart (1986) The costs and benefits of ownership: A theory
of vertical and lateral integration. Journal of Political
Economy 94(4): 691-719.
O.Hart and
J.Moore (1988) Incomplete contracts and renegotiations. Econometrica
56(4): 755-786.
G.Noldeke,
K.Schmidt (1995) Option contracts and renegotiations: A solution
to the hold-up problem. Rand Journal of Economics 26(2):
163-179
Y.K.Che
and D.B.Hausch (1999) Cooperative Investments and the value
of contracting. American Economic Review 89(1): 125-147
14. Incomplete
contracts and theory of the firm. Models of authority.
4
6, ch.2-3
O.Hart and
J.Moore (1990) Property rights and the nature of the firm. Journal
of Political Economy 98(6): 1119-1158.
P.Aghion
and J.Tirole (1997) Formal and real authority in organizations.
Journal of Political Economy 105(1) 1-29.
