Contract Theory

2020/2021

Academic Year

ENG

Instruction in English

4

ECTS credits

Delivered at:

International College of Economics and Finance

Course type:

Elective course

When:

3 year, 3, 4 module

Course Syllabus

Abstract

This course provides an overview of the classical as well as advanced topics in contract theory. We are going to start with the classical principal-agent models of screening and moral hazard and learn how managers create incentives for their employees. These models involve two parties: a principal (e.g. manager) and an agent (e.g. employee). The principal delegates a task to the agent by offering him a contact. In the moral hazard problem, the agent's actions are hidden (noncontractible), yet they affect an outcome that can be included in a contract. In the screening problem, the agent has some private information relevant to the task. In both problems, asymmetric information creates inefficiency. In the second part of the course we consider various extensions of these two problems to many agents and dynamic environment. At the end of the course we'll shift gears to a different area of market design and learn how to get married (matching theory). Pre-requisites: Calculus, Probability Theory, Mathematics for Economists. This course deepens students' understanding of the last part of Microeconomics-2 course, market failure and efficiency.

Learning Objectives

• introduce basic concepts of principal-agent models
• explain main trade-offs the principal is facing when designing an optimal contract
• connect studied theoretical concepts to real life

Expected Learning Outcomes

• identify and solve models that are based on adverse selection
• Explain the main tradeoffs in models with moral hazard.
• solve special cases (binary model, linear model)
• Identify adverse selection and moral hazard in advanced models, be able to solve simple cases
• Apply deferred acceptance algorithm to one-to-one matching problems.

Course Contents

• Adverse selection
  Screening model with two types. Application to the seller-buyer, lender-borrower, employer-employee. Extensions: ex ante contracting, limited liability, different outside options, optimal income taxation.
• Moral hazard
  Simple model with binary outcome and binary action. Linear contracts. Multitasking
• Advanced topics
  Moral hazard in teams. Career concerns. Relational contracts.
• Matching theory
  Deferred acceptance algorithm. Lattice structure of stable matchings. Strategy-proofness: impossibility result. Many-to-one matching.

Assessment Elements

• home assignments
• in-class quizzes
• midterm
• final exam

Interim Assessment

• Interim assessment (4 module)
  0.25 * final exam + 0.25 * home assignments + 0.25 * in-class quizzes + 0.25 * midterm

Bibliography

Recommended Core Bibliography

• Patrick Bolton, & Mathias Dewatripont. (2005). Contract Theory. The MIT Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.b.mtp.titles.0262025760
• Roth, A. E., & Sotomayor, M. A. O. (1992). Two-Sided Matching. Cambridge University Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.b.cup.cbooks.9780521437882

Recommended Additional Bibliography

• Microeconomic theory, Mas-Colell, A., 1995