Theory of Incentives

Guest Instructor: 
Raffaele Fiocco
Dongyu Guo
Time I: 
10:00am to 02:00pm
Venue I: 
HU Berlin, SPA1, Room 203

The course reviews the main topics and models of the incentive theory. It focuses on the principal-agent paradigm where the principal delegates an action to a single agent through the take-it-or-leave-it offer of a contract. Major topics are represented by the problem of adverse selection, which occurs when the agent learns some piece of information relevant to the contractual relationship, and the problem of moral hazard, which appears as soon as the agent’s actions are not observable. First, the trade-offs that emerge in these contexts are characterized: the rent extraction-efficiency trade-off under adverse selection and the trade-offs between the extraction of limited liability rent and efficiency and also between insurance and efficiency under moral hazard. Then, extensions of the basic framework to more complex environments are discussed. Mixed models with adverse selection, moral hazard and nonverifiability of the state of the world are also treated. Principal-agent models with adverse selection and moral hazard are finally considered in a dynamic context.

Laffont/Martimore, "The Theory of Incentives: The Principal-Agent Model", 2001
Bolton/Dewatripont, "Contract Theory", 2005
Salanié, "The Economics of Contracts", 2005
Macho-Stadler, Perez-Castrillo, "An Introduction to the Economics of Information: Incentives and Contracts", 2001
Mas-Colell, Whinston, Green, "Microeconomic Theory", 1995
Written exam (90 min)
Spring 2012
Humboldt-Universität zu Berlin