AØKA08055U Contract Theory and the Economics of Organization
The course provides an introduction to contract theory. Contract theory examines the characteristics of optimal contracts when one party has certain relevant knowledge that the other party does not have.
The course consists of two parts. In the first part, some of the basic ideas in contract theory are presented. We will, in particular, look at optimal contracts when one party has hidden information (adverse selection) or can take a hidden action (moral hazard). In the second part of the course we apply the insights obtained to a number of specific economic questions, studying some original journal articles.
In the first part we will study selected sections of chapters 2-5 of the textbook by Laffont and Martimort. Chapter 2 explains the basic idea and insights of adverse selection. Chapter 3 studies some important extensions of the basic adverse selection model: for example, environments where the agent may be of more than two “types”, which may lead to “bunching” (i.e., several types being offered the same contract).
Chapter 4 explains the basic idea and insights of moral hazard, using a very stylized model with two effort levels and two possible outcomes. Chapter 5 extends this model in some interesting ways, for example: environments with a continuous effort variable, leading to a discussion of the so-called first-order approach.
The journal articles that we will study are about the political economy of industrial economics, and managerial incentives and product market competition.
The primary aim of the course is to introduce students to
central results and insights in contract theory. An additional aim
is to familiarize students with some selected examples of how
contract theory can be used to study economic questions. A broader
aim is that students who take the course will, by working
extensively with theoretical models, acquire analytical skills that
are transferable to other kinds of intellectual problems.
After having successfully completed the course the students will be
able to formulate and solve contract theory models. The students
will also be able to read professional journal articles that apply
contract theory and to use this broad analytical approach when
analyzing and thinking about questions where incentives play a
role.
In order to pass the course, the student must demonstrate
familiarity with and understanding of the approach of contract
theory. Moreover, the student must show ability to solve and work
with models used in contract theory and ability to understand the
logic behind the results. The very good should at the end of the
course be able to demonstrate full or almost full capability of
using and understanding the techniques of analysis taught in the
course.
Textbook: Laffont, Jean-Jacques, and David Martimort (2002), The Theory of Incentives: The Principal-Agent Model, Princeton University Press.
- The Introduction (pages 1-6).
- Sections 2.1-2.6, 2.9, 2.10 (except 2.10.2 and 2.10.3), and 2.15.2.
- Sections 3.1 and 3.7.
- Introduction to Ch. 4 (pages 145-148), Sections 4.1-4.4 up until and including Proposition 4.5 on page 161.
- Section 4.5
- Section 5.1.2
- Sections 5.2.1 and 5.2.2.
We will also study selected journal articles.
- Category
- Hours
- Exam
- 3
- Lectures
- 42
- Theory exercises
- 161
- Total
- 206
- Credit
- 7,5 ECTS
- Type of assessment
- Written examination, 3 hours under invigilation3 hours written exam taking place at Peter Bangs Vej 36.
- Exam registration requirements
- As a part of the course, three written assignments out of four should be completed and accepted.
- Aid
- Without aids
- Marking scale
- 7-point grading scale
- Censorship form
- External censorship
100 % censurship
- Exam period
- Will be updated before the start of the semester
- Re-exam
- Same as ordinary. But if only a few students have registered for the re-exam, the exam might change to an oral exams with a synopsis to be handed in. This means that the examination date also will change.
Criteria for exam assesment
The Student must in a satisfactory way demonstrate that he/she has mastered the learning outcome of the course.
Course information
- Language
- English
- Course code
- AØKA08055U
- Credit
- 7,5 ECTS
- Level
- Full Degree Master
- Duration
- 1 semester
- Placement
- Autumn
- Schedule
- Autumn (week 36-50)
- Continuing and further education
- Price
320 DKK per ECTS
- Study board
- Department of Economics, Study Council
Contracting department
- Department of Economics
Course responsibles
- Benjamin Falkeborg (18-6669726e65716d72326a65706f696673766b4469677372326f7932686f)