• A
  • A
  • A
  • ABC
  • ABC
  • ABC
  • А
  • А
  • А
  • А
  • А
Regular version of the site
Bachelor 2018/2019

Contract Theory

Area of studies: Economics
When: 3 year, 3, 4 module
Mode of studies: Full time
Instructors: Tatiana Mayskaya
Language: English
ECTS credits: 4

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

Learning Objectives

  • enable students to identify real life situations where the studied concepts (adverse selection and moral hazard) are applicable;
  • describe main trade-offs the principal is facing when designing an optimal contract
  • make sure students understand books and papers that contain economic theories based on studied concepts
  • enable students to solve models with a given setup related to studied concepts
Expected Learning Outcomes

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

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

Assessment Elements

  • non-blocking exam
  • non-blocking midterm
  • non-blocking homeworks
Interim Assessment

Interim Assessment

  • Interim assessment (4 module)
    0.5 * exam + 0.25 * homeworks + 0.25 * midterm
Bibliography

Bibliography

Recommended Core Bibliography

  • Cvitanić, J., & Zhang, J. (2013). Contract Theory in Continuous-Time Models. Berlin: Springer. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=533539

Recommended Additional Bibliography

  • Microeconomic theory, Mas-Colell A., Whinston M. D., 1995