Economics of Contracts A Primer

ISBN-10: 0262195259

ISBN-13: 9780262195256

Edition: 2nd 2005

Authors: Bernard Salani�

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The theory of contracts grew out of the failure of the general equilibrium model to account for the strategic interactions among agents that arise from informational asymmetries. This popular text, revised and updated throughout for the second edition, serves as a concise and rigorous introduction to the theory of contracts for graduate students and professional economists. The book presents the main models of the theory of contracts, particularly the basic models of adverse selection, signaling, and moral hazard. It emphasizes the methods used to analyze the models, but also includes brief introductions to many of the applications in different fields of economics. The goal is to give readers the tools to understand the basic models and create their own. For the second edition, major changes have been made to chapter 3, on examples and extensions for the adverse selection model, which now includes more thorough discussions of multiprincipals, collusion, and multidimensional adverse selection, and to chapter 5, on moral hazard, with the limited liability model, career concerns, and common agency added to its topics. Two chapters have been completely rewritten: chapter 7, on the theory of incomplete contracts, and chapter 8, on the empirical literature in the theory of contracts. An appendix presents concepts of noncooperative game theory to supplement chapters 4 and 6. Exercises follow chapters 2 through 5.
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Book details

List price: $47.00
Edition: 2nd
Copyright year: 2005
Publisher: MIT Press
Publication date: 3/11/2005
Binding: Hardcover
Pages: 256
Size: 6.20" wide x 9.25" long x 0.25" tall
Weight: 1.100
Language: English

Foreword to the Second Edition
Foreword to the First Edition
The Great Families of Models
The Principal-Agent Model
Overview of the Book
Adverse Selection: General Theory
Mechanism Design
General Mechanisms
Application to Adverse Selection Models
A Discrete Model of Price Discrimination
The Consumer
The Seller
The First-Best: Perfect Discrimination
Imperfect Information
The Standard Model
Analysis of the Incentive Constraints
Solving the Model
Adverse Selection: Examples and Extensions
Examples of Applications
Regulating a Firm
Optimal Taxation
The Insurer as a Monopolist
Perfect Competition in Contracts
Multiple Principals
The Theory of Auctions
Risk-Averse Agents
Multidimensional Characteristics
Bilateral Private Information
Type-Dependent Reservation Utilities
Auditing the Agent
Signaling Models
The Market for Secondhand Cars
Costly Signals
Separating Equilibria
Pooling Equilibria
The Selection of an Equilibrium
Costless Signals
A Simple Example
The General Model
Other Examples
The Informed Principal
Moral Hazard
A Simple Example
The Standard Model
The Agent's Program
The Principal's Program
Properties of the Optimal Contract
Informativeness and Second-Best Loss
A Continuum of Actions
The Limited Liability Model
An Infinity of Outcomes
The Multisignal Case
Imperfect Performance Measurement
Models with Several Agents
Models with Several Principals
The Robustness of Contracts
The Multitask Model
Examples of Applications
Wage Determination
The Dynamics of Complete Contracts
Commitment and Renegotiation
Strategic Commitment
Adverse Selection
Full Commitment
Long-Term Commitment
No Commitment
Short-Term Commitment
Moral Hazard
Renegotiation after Effort
Convergence to the First-Best
Finitely Repeated Moral Hazard
Incomplete Contracts
Property Rights, Holdup, and Underinvestment
The Buyer-Seller Model
The Complete Contract
Incomplete Contracts and Property Rights
The Irrelevance Theorems
Restoring Efficient Investment Incentives
Using Mechanism Design
Concluding Remarks
Some Empirical Work
Dealing with Unobserved Heterogeneity
Tests of Asymmetric Information in Insurance Markets
Some Noncooperative Game Theory
Games of Perfect Information
Nash Equilibrium
Subgame-Perfect Equilibrium
Games of Incomplete Information
Bayesian Equilibrium
Perfect Bayesian Equilibrium
Refinements of Perfect Bayesian Equilibrium
Name Index
Subject Index
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