Theory of contracts and incentives


The goal of the course is to study a number of important results of the Theory of Contracts and Incentives. We focus mainly on the classical static models at the beginning and introduce dynamic theories at the end. The first part is devoted to Principal-Agent Theory in various contexts: under pure moral hazard; in the pure adverse selection case. In the second part we study multi-agent models: incentives in teams; yardstick competition; tournaments. The third part is an introduction to dynamic theories: implicit contracts under complete information; relational contracts; repeated principal-agent relationships.


1- The Principal-Agent Model under Pure Moral Hazard : The trade-off between Insurance and Incentives. Grossman and Hart’s model. Extensions and applications.

2- The Principal-Agent Model under Pure Adverse Selection :Some Implementation Theory. Revelation Principle. Incentive Constraints. Trade-off between efficiency and rent extraction. Application to optimal regulation: Laffont and Tirole’s model.

3- Teams : Incentives in teams. Yardstick Competition.  Tournaments.

4- Introduction to Dynamic Approaches :Self-enforcing or implicit labour contracts. McLeod and Malcomson’s model of labour contracts. Career Concerns. Relational Contracts.


Jean-Jacques Laffont and David Martimort (2002), Theory of Incentives: The Principal-Agent Model, Princeton University Press.
Andreu MasColell, Michael Whinston and Jerry Green (1995), Microeconomic Theory, Oxford University Press.
Patrick Bolton and Mathias Dewatripont (2004), Contract Theory, MIT Press.