12 votes
Accepted

What is the definition of "First Best", "Second Best", etc. in contract theory?

In contract theory The first-best refers to the best you could do if you knew agents' preferences over labor and income (i.e., if you did not have to impose the incentive compatibility constraint), ...
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7 votes

Lab experiments for a course in standard contract theory

There are a couple of papers by Hoppe-Schmitz in GEB that might be useful: Hoppe, E.I. and Schmitz, P.W., 2011. Can contracts solve the hold-up problem? Experimental evidence. Games and Economic ...
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  • 71
5 votes

Signalling in a moral hazard contract with informed principals (that know their own type before contracting)

I'm not sure what exactly you're looking for, but here are some wild guesses: Bolton and Dewatripont (2005) Contract Theory, MIT Press. [Probably Chapters 5 and 6] Maskin and Tirole (1990) "The ...
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  • 14.3k
5 votes

Payoff from an option contract

When integrals look different than what pops into your head, often the reason is integration by parts. For your example note that $$\int_R^1 (\theta -R) g(\theta) d \theta + \int_R^1 G(\theta) d \...
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  • 5,090
5 votes

What is the definition of "First Best", "Second Best", etc. in contract theory?

The solution to an optimal contract problem is called "first best" if it maximizes the principal's objective function subject to all constraints except the incentive constraints. The solution to an ...
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  • 551
5 votes

General mathematical model of incomplete contracts?

Just a model that can be used to state how (in)complete a particular contract is, whatever the reason. I remember a debate at the end of the 90's on Incomplete Contracts: Where do We Stand? by Jean ...
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  • 6,652
4 votes

What is the definition of "First Best", "Second Best", etc. in contract theory?

First Best is the ideal optimal solution of a given problem, i.e. the mathematical solution of the model with "no imperfections". If that solution is not attainable then the solution must be binding ...
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4 votes

Signalling in a moral hazard contract with informed principals (that know their own type before contracting)

Contracting with an informed principal is not so easy because the agent can learn about the principal's type from the kind of contract offered. This introduces signaling, which can quickly get messy. ...
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  • 5,090
3 votes

Where can I learn random matching models?

If you have in mind infinite populations I'd suggest Carlos Alós-Ferrer (1999) Dynamical Systems with a Continuum of Randomly Matched Agents, Journal of Economic Theory 86 (2), 245-267.
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  • 4,527
3 votes

Contract theory: Incentive contracts (when agents have multiple tasks) models by G. Baker and Holmstrom & Milgrom

Holmström and Milgrom assume that the agent exhibits constant absolute risk aversion. This implies that if you change the total wage of the agent with a lump sum transfer (that does not depend on ...
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3 votes

Are there studies that empirically validate results in contract theory?

An excellent (if slightly old) survey on the empirics of contracts can be found in Pierre-André Chiappori and Bernard Salanie (2003) "Testing Contract Theory: A Survey of Some Recent Work", in ...
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  • 16.6k
3 votes
Accepted

Adding a non-binding constraint to the objective function

To illustrate what Tirole has done, let's consider a simpler environment. Consider a utility maximisation problem over two goods, $x$ and $y$. The consumer has utility function $u(x,y) = f(x) + y$, ...
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3 votes

how can I find the original work on the bases of which 2016 nobel in economics was given?

It is based on multiple pieces of work, most of which can be found in the prize committee's thoroughly referenced announcement.
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2 votes

Smart contracts in Dollars

I guess it depends on what precisely counts as "self-executing" but escrow transactions are very similar and quite common, particularly in real estate and certain kinds of online transactions. An ...
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  • 15.9k
2 votes

What kind of contractual problem is this?

In the above-mentioned quote, Oliver Hart is talking about a problem caused by incomplete contracts. Specifically, he is referring to the following paper: Hart, O., Shleifer, A. and Vishny, R.W. (...
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2 votes

What kind of contractual problem is this?

This looks like a case of incomplete contracts, or what is sometimes known as non-contractibility. In the principal/agent paradigm, adverse selection arises when an informed agent transacts with an ...
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  • 16.6k
2 votes

Relation between incomplete contracting and the principal agent problem?

Not all principal-agent problems are the result of incomplete contracts, no. In fact, in most principal-agent problems, complete contracts are assumed. An incomplete contract is one that cannot be ...
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  • 571
2 votes
Accepted

Principal-Agent Problem with Two Agents

While it's not explicitly mentioned in the question, it seems safe to assume that the manager gets to observe separately the outcome of each worker, i.e. the value of $v_i$ for $i=1,2$. If this is the ...
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  • 14.3k
1 vote

Which mathematics are required for fully understanding the theories of the firm?

I haven't gone through all the papers so I just sampled 'The Firm as an Incentive System'. Browsing through it, it relies on Linear Algebra and Real Analysis. Again, I warn that I have not gone ...
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1 vote
Accepted

What is the meaning of "labor input" in the context of incentive theories?

Since the authors state that the total labor input is: $$\int t_i(k)dk$$ the meaning of the total labor input in this case would be that it is the sum of all attention $t_i$ allocated over those tasks ...
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  • 41.6k
1 vote

Expected Utility and Jensen's Inequality

Didn't manage to get to a definitve answer in one shot, but it seems to me that Jensen inequality is not going to help much. Build up: You are essentially asking that \begin{equation} E_v \...
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1 vote
Accepted

Reservation utility

I suspect the $μ$ is introduced to account for the fact that no party can be forced to enter into a contract. Thus if we want to maximize the joint surplus that only works if both parties are willing ...
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