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Accueil - Contract theory (con)

Contract theory (con)

Code interne : (con)
Responsable(s) :
Programme de cours :

(mars 2022)

 

This 20-hour course is offered at the Master 2 level (5th year of Economics) in the Master Corporate Strategy and Industrial Organization at university Paris Pantheon Assas. It is based on the book by Jean-Jacques Laffont and David Mortimort “THE THEORY OF INCENTIVES I :

THE PRINCIPAL-AGENT MODE »

 

The objective of the course is to provide a high level of comprehension of the role of contract theory in the true life. It is applied to the working relation inside the firm since every single student will somedays work in an organization either as an Agent (who produces) or as a Principal (who delegates the production).

 

Under perfect information a labor market equilibrium is defined as a wage such that the demand for labor equals the supply of labor at that particular wage. At the optimum the wage positively depends on the marginal productivity of workers. This is the first best equilibrium.

 

Under asymmetric information, such a concept of equilibrium is no longer relevant. It is necessary to replace the vector wage by a labor contract that encompasses both a quantity of good to be produced and a transfer (the wage) from the Principal who delegates the production to the Agent. We study the second best optimum. Under asymmetric information, there are two main situations: adverse selection and moral hazard.

 

Chapter 1 deals with Adverse selection: some individual’s characteristics, which are relevant for production, are unobservable to the Principal. The optimal labor contract is computed. Some extension to bunching (different workers receive the same wage) and shut-down of the low type individual or pooling equilibria are presented. The Myerson’s Principle of revelation is developed.

 

Chapter 2 is devoted to moral hazard: some individual’s action, which are relevant for production, are unobservable to the Principal. The optimal labor contract is computed for a risk neutral agent as well as for a risk adverse agent. General utilities are considered and the information rent extraction is studied at the second best optimum.