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   Course Title    Contract Theory
Lecturer    Anna Ingster
Institution    European University of St. Petersburg
Country    Russia

I. Introduction

  1. Locating the content of the course within the discipline
  2. The course on Contract Theory is one of the advanced courses of the Economics program at the European University at St.Petersburg.

    Contract theory is the most active area in modern microeconomic theory, as well as an increasingly important paradigm for applied microeconomic analysis.

  3. Locating the course within the curriculum

The course on Contract Theory is taught in the last terms of the curricula of the university. This is a short course of 28 hours, which is taught to students after they have studied the obligatory basic economic subjects.

II. Objectives of the Course

  1. Academic aims
  2. The theory of contracts originates in the failures of general equilibrium theory. The idea is to turn away temporarily from general equilibrium models, whose description of the economy is consistent but not realistic enough, and to focus on necessarily partial models that take into account the full complexity of strategic interactions between privately informed agents in well-defined institutional settings.

  3. Learning outcomes

The aims of the course on Contract Theory are to get students accustom with the tools of modern microeconomic analysis within Contract Theory and more generally economics of information.

III. Course Detail

  1. Introduction
  2. Lecture 1. This lecture provides a general overview of the course, its goals and structure. The main families of the models are introduced. The general Principal-Agent setting is presented within the lecture.

  3. Complete contracts (statics)
  4. Adverse selection

    Lecture 2. The basic simple model of adverse selection is introduced to illustrate the basic features of the topic. The introduction to Mechanism Design is given. The Revelation Principle is introduced as the basic tool of the analysis.

    Lecture 3. More advanced differential model of adverse selection is analyzed.

    Lecture 4. A brief introduction is given to applications of the theory: regulation of a firm, optimal taxation, theory of auctions.

    Signaling models

    Lecture 5. The market for Second-hand Cars: Akerlof model. The models of costly signals, separating and pooling equilibria. The selection of an equilibrium.

    Lecture 6. The models of costless signals: possibility of commitment

    Moral hazard

    Lecture 7. The concept of moral hazard. A Simple example of moral hazard model (two action two outcome).

    Lecture 8. The Standard model of moral hazard: finite dimensional case, the properties of optimal contract.

    Lecture 9. Examples and applications: insurance, wage determination.

  5. Dynamics of complete contracts
  6. Lecture 10. Commitment and renegotiation: the key notions when study dynamics. The dynamics of adverse selection models.

    Lecture 11. An introduction to dynamics of moral hazard models.

  7. Incomplete contracts
  8. Lecture 12. Observable but not verifiable effort. Property and residual control rights. Contract incompleteness and underinvestment.

    Class discussion

  9. Overview of empiric studies

    Lecture 14. Introduction to empirical studies: adverse selection, auction theory, moral hazard, dynamics.

IV. Assessment

Assessment of students is done by written examination at the end of the course. The exam includes theoretical questions as well as exercises and analytical questions. The students are also required to prepare homework including exercises and analytical questions on current topics. The final grade is calculated from the final exam (50%) and homework (50%). The conditions and the way of assessment are announced to the students at the first lecture.

V. Reading List

  1. Milgrom, P., and J. Roberts (l992) Economics, Organization and Management, Englewood Cliffs, NJ: Prentice Hall.
  2. Hart, O. (l995), Firms, Contracts and Financial Structure, Oxford University Press.
  3. Salanie, B. (1997), The Economics of Contracts, MIT Press.
  4. Grossman, S., and O. Hart (1983), "An Analysis of the Principal-Agent Problem," Econometrica, 51:7-45.
  5. Fudenberg, D., and J. Tirole (1990), "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, 58:l279-l3l9.
  6. Fudenberg, D., and J. Tirole (1991), Game Theory, MIT Press, Chap. 7
  7. Fudenberg, D., and J. Tirole (1991), Game Theory, MIT Press, Chap. 10, pp. 397-434.
  8. Laffont, J. J., and J. Tirole (1988), "The Dynamics of Incentive Contracts," Econometrica, 56:1153-1175.
  9. Tirole, J. (1986), "Hierarchies and Bureaucracies," Journal of Law, Economics and Organization, Fall, pp. l8l-2l4.
  10. Coase, R. (1988), "The Nature of the Firm: Origin, Meaning, Influence," Journal of Law, Economics and Organization, 4:1.
  11. Boycko, M., A. Shleifer, and R. W. Vishny (1995), Privatizing Russia, MIT Press.
  12. Schmidt, K. (1996), The Costs and Benefits of Privatization: an Incomplete Contracts Approach," Journal of Law, Economics and Organization, 12:1-24.

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