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. 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) 

5. Trade-off among limited liability, rent-extraction, and efficiency
6. Insurance and efficiency
7. 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: J. Tirole, "The Theory of Corporate Finance" Princeton University Press, 2006.

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 discussed in class by the professor, and some others 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 20% of the final grade, and the final exam will account for the remaining 80%.

The final grade 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