CONTRACT THEORY (K. DIAW)
PRE-REQUISITES: Strong Microeconomics and Game Theory background
LITERATURE (compulsory and/or recommended):
Main Textbooks
Laffont J.J. and D. Martimort “The Theory of Incentives” Princeton
Salanie, B. “The Economics of Contracts” MIT Press
Bolton, P. and M. Dewatripont: “Introduction to Contract Theory” Manuscript.
Complementary Textbooks
Macho-Stadler, I. And J. David Perez-Castrillo, “An Introduction to the Economics of
Information”
Fudenberg D. and J. Tirole “Game Theory” MIT Press
Chapter 1: Adverse selection
Baron D., and R. Myerson (1982), “Regulating a Monopolist with Unknow Cost,”
Econometrica 50, 911-30.
Guesnerie, R., and J.J. Laffont (1984), “A Complete Solution to a Class of Principal-Agent
Problems with an Application to the Control of a Self-Managed Firm,” Journal of Public
Economics 25, 329-69.
Hart, O. (1993), “Optimal Labour Contracts Under Asymmetric Information: An
Introduction,” Review of Economic Studies, 50, 3-35
Laffont J.J. (1994), “The New Economics of Regulation Ten Years After,” Econometrica 62,
507-37
Laffont J.J. and J. Tirole (1986), “Using Cost Observation to Regulate Firms” Journal of
Political Economy, 94, 614-41.
Myerson, R. (1979), “Incentive Compatibility and the Bargaining Problem,” Econometrica
47, 61-74.
Myerson, R. (1981), “Optimal Auctions Designs,” Mathematics of Operation Research, 6, 5873.
Rothschild M. and J. E. Stiglitz (1976), “Equilibrium in Competitive Insurance Market: An
Essay in the Economics of Imperfect Information,” Quaterly Journal of Economics 80, 62949.
Sappington, D. (1983), “ Limited Liability Contracts Between Principals and Agents,”
Journal of Economic Theory 29, 1-21.
Wilson C. (1977), “A model of Insurance Markets with Incomplete Information,” Journal of
Economic Theory 16, 167-207.
Chapter 2: Signaling
Akerlof, G. (1970), “The Market for Lemons: Quality Uncertainty and the Market
Mechanism,” Quaterly Journal of Economics, 89, 488-500.
Cho, I.K. and D. Kreps, “Signalling Games and Stable Equilibria,” Quaterly Journal
of Economics, 102, 179-221
Crawford V. and J. Sobel (1982), “Strategic Information Transmission”,
Econometrica, 50 (6), 1431-51
Maskin, E. and J. Tirole (1992), “The Principal-Agent Relationship with an Informed
Principal. II: Common Values,” Econometrica 60: 1-42
Modigliani, F. and M.H. Miller (1958), “Cost of Capital, Corporation Finance and the
Theory of Investment,” American Economic Review, 48(3), 261-97
Myers, S.C. and N.S. Majluf (1984), “The Capital Structure Puzzle,” Journal of
Finance 39, 575-92
Spence, M.(1973), “Job Market Signaling,” Quaterly Journal of Economics, 87, 35574.
Chapter 3: Moral Hazard
Grossman S. and O. Hart (1983), “An Analysis of the Principal-Agent Problem”,
Econometrica, 51, 7-45
Holmstrom, B. (1979), “Moral Hazard and Observability,” Bell Journal of Economics 10, 7491.
Holmstrom, B. and P. Milgrom, “Multitask principal-agent analyses: Incentive contracts,
asset ownership and Job design,” Journal of Law, Economics, and organizations 7:24-52.
Mirlees, J. (1999), “The Theory of Moral Hazard and Unobservable Behaviour: Part I,”
Review of Economic Studies, 66, 3-21
Rogerson, W.P. (1985), “The First-Order Approach to Principal-Agent Problems,”
Econometrica 53, 1357-67.
Shapiro, C., and J. Stiglitz (1984), “Equilibrium Unemployment as a Worker
Discipline Device,” American Economic Review 74, 433-44.
Shavell, S. (1979), “Risk Sharing and Incentives in the Principal and Agent
Relationship,” Bell Journal of Economics, 10, 55-73
Chapter 4: Dynamic contracting
Dewatripont, M. (1988), “Commitment Through Renegotiation-Proof Contracts with Third
Parties,” Review of Economic Studies 55, 377-90.
Dewatripont, M. (1989), “Renegotiation and Information Revelation over Time: The Case of
Optimal Labor Contracts,” Quaterly Journal of Economics 104, 589-619.
Chiappori, P.A., I. Macho, P. Rey and B. Salanie (1994), “Repeated Moral Hazard: The Role
of Memory, Commitment, and he Access to Credit Markets,” European Economic Review,
38, 1527-53
Fudenberg, D. and J. Tirole (1990), “ Moral Hazard and Renegotiation in Agency Contracts,”
Econometrica, 58, 1779-1320.
Hart, O. and J. Tirole (1988), “Contract Renegotiation and Coasian Dynamics,” Review of
Economic Studies 55, 509-540.
Laffont, J.J., and J. Tirole (1988), “The Dynamics of Incentive Contracts,” Econometrica 56,
1153-75.
Laffont, J.J., and J. Tirole (1988), “Adverse Selection and Renegotiation in Procurement,”
Review of Economic Studies 57, 597-626.
Malcomson J. and F. Spinnewyn (1988), “The Multiperiod Principal-Agent Problem,” Review
of Economic Studies, 55, 391-408.
Rey, P. and B. Salanie (1990), “Long-Term, Short-Term and Renegotiation: On the Value of
Commitment in Contracting,” Econometrica, 58, 597-619.
Rey, P. and B. Salanie (1996), “On the Value of Commitment in Contracting with
Asymmetric Information,” Econometrica, 64, 1395-1414.
Rogerson, W.(1985), “Repeated Moral Hazard” Econometrica, 53, 69-76
Chapter 5: Multi-principals and Multi-agents Theory
Bernheim, D. and M. Whinston (1986), “Menu Auctions, Resource Allocations, and
Economic Influence,” Quaterly Journal of Economics 101, 1-31.
Demski, J., and D. Sappington (1984), “Optimal Incentive Contracts with Multiple Agents,”
Journal of Economic Theory, 33, 152-171.
Holmstrom, B. (1979), “Moral Hazard in Teams,” Bell Journal of Economics 13, 324-40.
Itoh, H. (1990), “Incentives to Help in Multi-Agent Situations,” Econometrica 59, 611-36
Legros, P. and H. Matsushima (1991), “Efficiency in Partnerships”, Journal of Economic
Theory, 55, 296-322
Legros, P. and S. Matthews (1993), “Efficient and Nearly-Efficient Partnerships,” Review of
Economic Studies, 60(3), 599-611
Martimort, D. (1992), “Multiprincipaux avec Selection Adverse,” Annales d’Economie et de
Statistique, 28, 1-38
Martimort, D. (1996), “ Exclusive Dealing, Common Agency and Multiprincipals Incentive
Theory, Rand Journal of Economics, 27, 1-31
Martimort, D., and L. Stole (1998), “Communication Spaces, Equilibria Sets, and the
Revelation Principle under Common Agency,” mimeo, University of Chicago
Mookherjee, D. (1984), “Optimal Incentive Schemes in Multi-Agent Situations,” Review of
Economic Studies 51, 433-46.
Rasmusen, E. “Moral Hazard in Risk-Averse Teams,” Rand Journal of Economics, 18, 428435.
Stole, L. “Mechanism Design under Common Agency: Theory and Applications,” mimeo,
University of Chicago