Questions tagged [contract-theory]

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Type dependent outside option/reservation utility

This is a reference request. I am looking for references that would serve as a starting point or easy introduction to problems dealing with type-dependent reservation utility in the basic asymmetric ...
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Lab experiments for a course in standard contract theory

I am teaching a course in contract theory based on the textbooks by Bolton/Dewatripont and Laffont/Martimort. I would like to briefly present some lab experiments to illustrate basic insights of ...
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Why does a buyer-employment contract dominate a spot contract in this example (Bolton & Dewatripont 11.1.2.5, p497)

I'm working through Bolton and Dewatripont, Section 11.1.2, and have some questions about material in 11.2.5 on the bottom of page 497. I've tried to abbreviate the setup below, followed by my ...
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The most used probability distributions in moral hazard models?

I'm engaged in making a variation of the canonical moral hazard model, but I need some examples of probability distributions to make some simulations and graphs. What are the probability distributions ...
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In a Principal Agent Model how to demonstrate that the optimal contract is second best?

I am working with a Risk Averse Principal and Risk Neutral agent (Along the lines of the Mascolell, Whinston and Green Chapter 14 Problem Number 14.B.2). Since the Principal is risk averse so here the ...
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Where can I learn random matching models?

The title says all. I need papers or textbooks that explain in detail (step by step, maybe showing some canonical results) how I can model random matching games. Does anyone have a reference? Thank ...
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Strange screening game were FS contracts equals optimal contracts

Consider the setting where a principal hires an agent to do a project. Payoff from project is $\pi = \beta e$, where $\beta \in \{1,2\}$ is the degree of the agent's talent and $e \in [0, +\infty]$ is ...
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3 votes
2 answers
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Signalling in a moral hazard contract with informed principals (that know their own type before contracting)

I was studying Laffont & Martimort textbook for a paper, but their section on moral hazard contract with informed principals assumes that the principal only knows his own type after contracting. ...
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Payoff from an option contract

In period 1 the consumer of type $\theta$ selects an option contract consisting of an up-front fee, $B>0$, and exercise price, $\bar{R}$. The consumer pays $B$ at the end of the first period. In ...
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Principal-Agent Problem with Two Agents

Consider the following principal-agent problem. You are a manager in charge of two workers, indexed with $i=1,2$. Each worker is asked to perform a particular task, and each can either work hard at ...
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Which mathematics are required for fully understanding the theories of the firm?

When I say "theories of the firm", I'm referring, in particular, to the theories exposed in the next works: 1) Transaction Cost Economics exposed in "Transaction Cost Economics" by ...
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What is the meaning of "labor input" in the context of incentive theories?

In the article "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design" (Holmström and Milgrom, 1991) it is said that two identical agents ($i=1,2$) devote ...
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Contract theory: Incentive contracts (when agents have multiple tasks) models by G. Baker and Holmstrom & Milgrom

So my question is the following: In both Baker's (2002) and H & M (1991) models we have a problem that a principal is trying to design a stimulating contract in such way that the agent will ...
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1 answer
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Expected Utility and Jensen's Inequality

Consider two random variables (costs and valuations) distributed $v\backsim G(.)$ and $c \backsim F(.)$ with pdfs $g(.)$ and $f(.)$. Let the supports of $c$ and $v$ be $[x,y]$. Let $x<a=E(v)<b&...
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Relation between incomplete contracting and the principal agent problem?

I have read about incomplete contracts in the context of vertical integration of firms, in which the two contracting parties are relatively "symmetric" (we cannot say that one is the agent and the ...
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General mathematical model of incomplete contracts?

I have read various articles about incomplete contracts, like Hart's papers and Milgrom's papers. But I have not found a paper that defines mathematically, in the most general way possible, what an ...
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3 answers
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What kind of contractual problem is this?

Oliver Hart, a Nobel Price winning economist, made the following case against privately founded prisons in an interview from 2017: “There are some things that are difficult to specify [in a contract ...
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1 vote
2 answers
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Reservation utility

I am self-studying contract theory using Bolton and Dewatripont (2005). It is meant for grad students, which might be why I am having a difficult time understanding basic terminology. Here is the ...
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A manifold of agents?

In contract theory and mechanism design, if the agents have one-dimensional characteristics, then they are usually considered as a contiuum on $\mathbb R$; if they have n-dimensional type, then they ...
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2 votes
1 answer
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Adding a non-binding constraint to the objective function

I am dealing with a constrained optimization problem found in Tirole's Theory of corporate finance. My question is not related to the details of this model, but just to provide some context, we are ...
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1 answer
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how can I find the original work on the bases of which 2016 nobel in economics was given?

I have been google and googling and asking around and I can not find the work(s) on the basis of which the nobel in economics was given yesterday. I really wanted to read them. does anyone know how to ...
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Dynamic contract theory: Demarzo, Fishman(2007) optimal long term financial contracting

I am reading Demarzo, Fishman(RFS,2007). Any suggestion will be appreciated. My questions are the following: (a) \begin{equation*} b_T^e(a) = \left\{\begin{array}{lll} -e^{(\gamma-r)(...
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1 answer
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Smart contracts in Dollars

In last years I have read a lot about "Smart contracts". But I cannot understand why we need bitcoin for this? The old-fashioned US Dollar are not used in Smart Contracts?
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1 vote
0 answers
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Foreseeability vs negligence

Why is it the case that contractual liability is usually defined by basis of foreseeability rather than negligence (like in tort law)? I am looking a good explanation for this from economics. I ...
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Principal agent question

Principal is interested in buying lake. The revenues of operating the lake as a camping site are determined by the weather (a random parameter $w$ distributed uniformly on $[0, 1]$) and by the ...
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13 votes
3 answers
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What is the definition of "First Best", "Second Best", etc. in contract theory?

What is the definition of "First Best", "Second Best", etc. in contract theory? Especially, what is the difference between "First Best" in contract theory and "ex-post efficient" in mechanism design?
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1 answer
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Are there studies that empirically validate results in contract theory? [closed]

I have started learning contract theory of late, and I find some of the assumptions and findings of the theory are too technical. Are there empirical studies that have validated concepts in contract ...
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