An Introduction to the Economics of Information Incentives and Contracts

by Macho-Stadler, Inés; Pérez-Castrillo, J. David; Watt, Richard

• ISBN13: 9780199243259
• ISBN10: 0199243255
• Edition: 2nd
• Format: Paperback
• Copyright: 2001-05-17
• Publisher: Oxford University Press

Summary

This is a graduate textbook on the theory of contracting under asymmetric information, a key part of modern microeconomic theory. It examines the characteristics of optimal contracts when one party has certain relevant knowledge that the other party does not. The various problems are presented in the same framework to allow easy comparison of the different results. This updated second edition substantially extends the exercises that test students' understanding of the material covered in each section.

Author Biography

Ines Macho-Stadler is Associate Professor of Economics at the Universitat Autonoma de Barcelona. He gained his Ph.D. in Economics from the Ecole Hautes Etudes en Sciences Sociales (Paris).
J. David Perez-Castrillo is Associate Professor of Economics at the Universitat Autonoma de Barcelona. He gained his Ph.D. in Economics from the Ecole Hautes Etudes en Sciences Sociales (Paris).

Table of Contents

Preface	vii
Introduction
Introduction	3	(1)
The Elements of the Problem	4	(3)
The Intertemporal Development of the Relationship and the Reference Framework	7	(2)
Types of Asymmetric Information Problems	9	(8)
Moral hazard	9	(2)
Adverse selection	11	(1)
Signalling	12	(5)
The Base Model
Introduction	17	(1)
Description of the Model	17	(4)
Symmetric Information Contracts	21	(16)
The optimal payment mechanism	23	(5)
The optimal level of effort	28	(3)
Exercises	31	(6)
The Moral Hazard Problem
Introduction	37	(2)
The Moral Hazard Problem	39	(2)
The Agent Chooses between Two Effort Levels	41	(6)
Solution Using the First-Order Approach	47	(2)
A Simple Case with Continuous Effort	49	(2)
Moral Hazard with Hidden Information	51	(3)
Some Comments on the Simple Moral Hazard Models	54	(3)
The value of information	55	(1)
Mechanisms based on severe punishments	55	(1)
The strategic effects of contracts	56	(1)
What happens when it is the agent who offers the contract?	57	(1)
Complementary Material	57	(9)
A geometric illustration of the moral hazard problem	57	(6)
The problem that may be found when applying the first-order approach	63	(1)
The risk-neutral agent case	64	(2)
Applications	66	(21)
Incentives for managers	66	(2)
Fishing contracts between countries	68	(4)
Moral hazard and rationing in the credit market	72	(3)
Introduction of know-how in technology transfer contracts	75	(4)
Exercises	79	(8)
Advanced Themes	87	(16)
Optimal payment mechanisms in situations of moral hazard with several agents	87	(5)
Organizational design in relationships with several agents	92	(2)
Moral hazard with several tasks	94	(3)
Repeated moral hazard	97	(2)
Relationships between several principals and one agent	99	(4)
The Adverse Selection Problem
Introduction	103	(3)
A Model of Adverse Selection	106	(11)
When Principals Compete for Agents	117	(10)
The benchmark: Symmetric information	118	(3)
Principals cannot distinguish agent type	121	(6)
Adverse Selection with a Continuum of Possible Types	127	(7)
Comments	134	(2)
Complementary Material	136	(6)
Implementable mechanisms	136	(3)
Moral hazard with private information (ex ante contract acceptance)	139	(3)
Applications	142	(26)
Competition between insurance companies	142	(7)
An analysis of optimal licensing contracts	149	(4)
Regulation in asymmetric information contexts	153	(4)
Decision of monopoly product quality	157	(3)
Exercises	160	(8)
Advanced Themes	168	(17)
Relationship with several agents: Auctions	168	(4)
Organization design	172	(4)
Repeated adverse selection	176	(3)
Models of moral hazard and adverse selection	179	(1)
Several principals	180	(5)
Signalling
Introduction	185	(1)
The Value of Private Information and of Signalling	185	(4)
Education as a Signal	189	(1)
The Agents Signal their Characteristic	190	(9)
Separating equilibrium	193	(2)
Pooling equilibrium	195	(2)
Conclusion	197	(2)
The Informational Power of Contracts	199	(10)
Symmetric information	200	(1)
The agent is uninformed as to difficulty of the job	201	(1)
Separating equilibra	202	(7)
Comments	209	(1)
Complementary Material	210	(2)
The intuitive criterium	210	(2)
Applications	212	(12)
Prices that signal quality	212	(1)
Optimal licensing contracts when the seller has private information	213	(4)
Debt level as a signal of the value of a firm	217	(2)
Exercises	219	(5)
Advanced Themes	224	(7)
Equilibrium refinements	224	(2)
Cheap-talk games	226	(2)
Optimal design of mechanisms in signalling models	228	(3)
Mathematical Appendix: Concavity and Optimization	231	(6)
References	237	(8)
Solution to the Exercises	245	(30)
Index	275	(4)
Additional Exercises	279