The course will focus on basic building blocks in the Theory of Incentives, with applications to the firm, organizations and labor contracts.

Part 1. The Principal-Agent Model under Pure Moral Hazard

Grossman and Hart’s model — The first-order approach — Holmström’s Informativeness Principle — The Multitask Agent Problem.

Part 2. The Principal-Agent Problem under Pure Adverse Selection

Introduction to Mechanism Design — Revelation Principle — Informational Rents and Second-best distortions — Countervailing incentives — Application to Optimal Regulation— Baron and Myerson’s Model — Laffont and Tirole’s Model.

Part 3. Incentives in Teams

Incentives in Teams: Coordination and Authority — Teams with incomplete information — Yardstick Competition — Tournaments

Part 4. Introduction to Dynamic Problems

Implicit or Self-enforcing contracts — Efficiency Wages à la Shapiro-Stiglitz — MacLeod and Malcomson’s Complete Information Model — Theory of Career Concerns — Promotions and Hierarchies — Implicit and Explicit Incentives combined — Relational Contracts.

Patrick Bolton and Mathias Dewatripont (2004), Contract Theory, MIT Press, Cambridge, Mass.

Jean-Jacques Laffont and David Martimort (2001), The Theory and Incentives, Princeton University Press, Princeton.

Edward P. Lazear (1995), Personnel Economics, MIT Press, Cambridge, Massachusetts.