During the 1960/70s, microeconomic theory came to acknowledge that many (if not most) economic transactions are characterized by asymmetric distribution of information – i.e., at least one of the parties participating in a transaction usually is privy to information that the remaining parties do not have access to. For example, the producer is usually better informed about the quality of the product than the potential buyers of that product. This asymmetric distribution of information subsequently was recognized to be a major impediment for transactions to be economically efficient. The Economics of Information in general and Contract Theory in particular addresses the question, how the inefficiencies arising from asymmetric distribution of information can best be mitigated by appropriate design of the contractual (or, more generally, institutional) framework that governs the transaction under consideration.
Chapter 1: Moral Hazard
- Chapter 4 in D. Martimort and J.-J. Laffont (2001), "The Theory of Incentives: The Principal-Agent Modell"
Chapter 2: Adverse Selection
- Chapter 2 in D. Martimort and J.-J. Laffont (2001), "The Theory of Incentives: The Principal-Agent Modell"
Even though we will work with precise mathematical formalizations of the ideas that we want to think and talk about, this course requires little more than a solid understanding of basic differential calculus. Other mathematical, game theoretic or econometrics knowledge is not required.
The references mentioned above are not meant to be mandatory readings but rather as voluntary for those who are interested in gaining additional related insights that go beyond the scope of this lecture.