This course is not a contract theory course per se. The aim is to focus on the micro-foundations and the analytical tools that come along with the contract theory literature. Thus, the course covers the key topics of game theory, particularly the fundamental solution concepts of dynamic games under incomplete information, and the illustration of   signaling games as prerequisites to acquire a deep understanding of the theory of contracts.  The second half of the course will cover the base models and the extensions of the Principal-Agent model, namely adverse selection, moral hazard and the mixed models.

Τhe main topics of game theory are covered by the instructor’s lecture notes that will be circulated in the classroom. Also, a suggested reading is the Roger Myerson‘s “Game theory. Analysis of Conflict” (M) published by Harvard University Press. At introductory level I suggest the «Games and Decision Making» authored by Aliprantis and  Chakrabarti, published by Oxford University Press. For the second half, the main text is the “Theory of Incentives. The Principal-Agent model” by Laffont and Martimort (LM), published by Princeton University Press.

 

Schedule

1. Introduction to normal form games – The underlying assumptions – Solution concepts – Nash equilibrium – Dominated strategies – Iterative elimination of dominated strategies – Nash equilibrium in mixed strategies.
2. The existence of Nash equilibrium- Refinements of Nash equilibrium – Perfect equilibrium – Proper equilibrium – Persistent equilibrium
3. Games with contracts – Games with communication – Correlated equilibrium – Signaling games (M ch. 6)
4. Extensive games – Reduction to normal form games – Subgame perfection (M ch. 4)
5. Extensive games with incomplete information –  Bayes Nash equilibrium – Sequential equilibrium (M ch. 4)
6. The basic adverse selection model- Optimal contracts – The rent-extraction-efficiency trade-off – Ex post participation- Commitment (LM sections 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, 2.9, 2.11, 2.12)
7.  Extensions – Generalized type space – Multidimensional asymmetric information Type-dependent participation  constraints – Limited liability – Audit mechanisms (LM sections 3.1, 3.2, 3.3, 3.4, 3.5, 3.6)
8. The basic moral hazard model – First best implementation – Two inefficiencies – Limited liability – Risk aversion – Multiple levels of performance (LM sections 4.1, 4.2, 4.3, 4.4, 4.5)
9. Multiple levels of effort in the moral hazard problem – The multitask incentive problem (LM sections 5.1, 5.2)
10. Adverse selection followed by moral hazard – Moral hazard followed by adverse selection  (LM sections 7.1, 7.2)