The Economics of Contracts, second edition: A Primer, 2nd Edition
256
The Economics of Contracts, second edition: A Primer, 2nd Edition
256eBook
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Overview
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.
Praise for the previous edition:
“The Economics of Contracts offers an excellent introduction to agency models. Written by one of the leading young researchers in contact theory, it is rigorous, clear, concise, and up-to-date. Researchers and students who want to learn about the economics of incentives will want to read this primer.”—Jean Tirole, Institut D'Économie Industrielle, Universite des Sciences Sociales, France
“Students will find this a very useful introduction to the ideas of contract theory. Salanié has managed to summarize a large amount of material in a relatively short number of pages in a highly accessible and readable manner.”—Oliver Hart, Professor of Economics, Harvard University
Product Details
| ISBN-13: | 9780262257879 |
|---|---|
| Publisher: | MIT Press |
| Publication date: | 03/11/2005 |
| Sold by: | Penguin Random House Publisher Services |
| Format: | eBook |
| Pages: | 256 |
| File size: | 2 MB |
About the Author
Table of Contents
Foreword to the Second Edition ix
Foreword to the First Edition xi
Introduction 1
The Great Families of Models 3
The Principal-Agent Model 5
Overview of the Book 6
References 8
Adverse Selection: General Theory 11
Mechanism Design 13
General Mechanisms 15
Application to Adverse Selection Models 16
A Discrete Model of Price Discrimination 18
The Consumer 19
The Seller 19
The First-Best: Perfect Discrimination 20
Imperfect Information 21
The Standard Model 27
Analysis of the Incentive Constraints 29
Solving the Model 33
Exercises 40
References 42
Adverse Selection: Examples and Extensions 43
Examples of Applications 43
Regulating a Firm 43
Optimal Taxation 47
The Insurer as a Monopolist 51
Extensions 57
Perfect Competition in Contracts 57
Multiple Principals 61
The Theory ofAuctions 65
Collusion 73
Risk-Averse Agents 76
Multidimensional Characteristics 78
Bilateral Private Information 82
Type-Dependent Reservation Utilities 88
Auditing the Agent 89
Exercises 91
References 93
Signaling Models 97
The Market for Secondhand Cars 98
Costly Signals 99
Separating Equilibria 102
Pooling Equilibria 103
The Selection of an Equilibrium 103
Costless Signals 107
A Simple Example 108
The General Model 109
Other Examples 114
The Informed Principal 116
Exercises 117
References 118
Moral Hazard 119
A Simple Example 122
The Standard Model 124
The Agent's Program 125
The Principal's Program 126
Properties of the Optimal Contract 129
Extensions 134
Informativeness and Second-Best Loss 134
A Continuum of Actions 135
The Limited Liability Model 136
An Infinity of Outcomes 138
The Multisignal Case 139
Imperfect Performance Measurement 140
Models with Several Agents 140
Models with Several Principals 142
The Robustness of Contracts 144
The Multitask Model 146
Examples of Applications 149
Insurance 149
Wage Determination 151
Exercises 156
References 159
The Dynamics of Complete Contracts 161
Commitment and Renegotiation 162
Strategic Commitment 164
Adverse Selection 168
Full Commitment 170
Long-Term Commitment 172
No Commitment 176
Short-Term Commitment 177
Conclusion 178
Moral Hazard 179
Renegotiation after Effort 179
Convergence to the First-Best 181
Finitely Repeated Moral Hazard 183
References 190
Incomplete Contracts 193
Property Rights, Holdup, and Underinvestment 195
The Buyer-Seller Model 196
The Complete Contract 197
Incomplete Contracts and Property Rights 198
The Irrelevance Theorems 200
Restoring Efficient Investment Incentives 200
Using Mechanism Design 204
Concluding Remarks 205
References 209
Some Empirical Work 211
Dealing with Unobserved Heterogeneity 212
Auctions 216
Tests of Asymmetric Information in Insurance Markets 218
References 221
Some Noncooperative Game Theory 223
Games of Perfect Information 224
Nash Equilibrium 224
Subgame-Perfect Equilibrium 224
Games of Incomplete Information 226
Bayesian Equilibrium 226
Perfect Bayesian Equilibrium 227
Refinements of Perfect Bayesian Equilibrium 229
References 232
Name Index 233
Subject Index 235
What People are Saying About This
The first edition of Salanié's book provided an insightful introduction to the modern economics of incentives and contracts. This second edition keeps up with recent advances while maintaining the emphasis on key ideas and intuitions. A great read.
Salanié provides a broad overview of the economics of contracts. Concision and clarity make the book an elegant introduction to the subject for newcomers. But it is also a useful reference for experienced students and researchers.
The first edition of Salanié's book provided an insightful introduction to the modern economics of incentives and contracts. This second edition keeps up with recent advances while maintaining the emphasis on key ideas and intuitions. A great read.
—Patrick Rey, IDEI, University of Toulouse
Salanié provides a broad overview of the economics of contracts. Concision and clarity make the book an elegant introduction to the subject for newcomers. But it is also a useful reference for experienced students and researchers.
—Roger Guesnerie, Collège de FranceSalanié has written an elegant book, concise in its explanations and tightly focused on the most useful models and results of contract theory. His experience in both theory building and theory testing are plain to see in his sure-handed choices, which separate the chaff from the wheat in this huge and growing body of theory. I recommend this book highly to students and newcomers to the economic theory of contracts.
—Paul Milgrom, Professor of Economics, Stanford UniversityThe first edition of Salanié's book provided an insightful introduction to the modern economics of incentives and contracts. This second edition keeps up with recent advances while maintaining the emphasis on key ideas and intuitions. A great read.
—Patrick Rey, IDEI, University of ToulouseSalanié has written an elegant book, concise in its explanations and tightly focused on the most useful models and results of contract theory. His experience in both theory building and theory testing are plain to see in his sure-handed choices, which separate the chaff from the wheat in this huge and growing body of theory. I recommend this book highly to students and newcomers to the economic theory of contracts.