B2214 - CONTRACT THEORY AND INCENTIVES

Learning outcomes

At the end of the class, the student has a working knowledge of the basic tools and results derived in contract theory. In particular, the student is able to analyze: - The implications of the lemons problem and market breakdown - Adverse selection, signaling and moral hazard in the principal-agent model. Finally, the student is able to apply these theoretical tools to the problems arising from the separation of ownership and control in corporate governance.

Course contents

INTRODUCTION: the theory of incentives

PART I: Optimal contracts with hidden information (adverse selection)

1. Rent extraction-efficiency trade-off
2. Revelation principle
3. Screening: monopoly and perfect competition

4. Signaling

5. Advanced topics: (i) type-dependent participation constraints; (ii) discrete vs continuous types; (iii) multidimensional asymmetric information; (iv) competing principals.

PART II: Optimal contracts with hidden action (moral hazard)

6. Trade-off among limited liability, rent-extraction, and efficiency
7. Insurance and efficiency
8. Advanced topics: (i) more than 2 effort levels; (ii) multitasking; (iii) mixed models with adverse selection and moral hazard.

Readings/Bibliography

The main textbook is: Laffont J.-J. and D. Martimort, "The Theory of Incentives: The Principal-Agent Model", Princeton University Press, 2002.

Further reading: A. Mas-Colell, M.D. Whinston, J.R. Green:"Microeconomic Theory", Oxford University Press, 1995.

Teaching methods

The course will be based predominantly on frontal lectures. Students are expected to attend lectures and complete the mandatory readings. A detailed list of readings will be provided during the course: some papers will be assigned to students for their presentation in front of their classmates.

Assessment methods

The course grade will be determined by a presentation by the student (or by a group of students, depending on the numerosity of the class) and a final written exam. The presentation will account for 30% of the final grade, and the written exam will account for the remaining 70%.

The final mark is graduated as follows:
- <18: failed
- 18: sufficient
- 19-23: satisfactory
- 24-26: good
- 27-29: very good
- 30 e lode: excellent

Teaching tools

Slides and digital boards that will be uploaded in Virtuale

Office hours

See the website of Nadia Burani