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Indiana University Bloomington

BEPP

Global Reputation

Our international faculty members have held positions as government advisors, members of supranational organizations, and leaders of international corporations.

  1. G753
    Agency Theory
    • 7-weeks
    • 1.5 credits
    • Prerequisite: None

    Agency issues are important in many business settings and the principal-agent model is central in accounting, economics, finance, management, and marketing.  In this course, we provide a focused introduction to the basic moral hazard and adverse selection/screening agency models and then use them to study aspects of managerial compensation and insurance and financial markets, as well as marketing strategies such as price discrimination, price/quality market segmentation, and supply chain management.  As time permits, we may also cover topics in repeated bilateral contracting and/or incomplete contracts and institutional design.

    A.    The Kuhn-Tucker method (optimization subject to inequality constraints).

    B.    The basic moral hazard problem.  Applications to insurance and supply chain management.

    C.    The Holmström-Milgrom (1991) linear moral hazard model.  Applications to managerial compensation, including    the optimal compensation formula, relative performance pay, the Informativeness Principle, and the Equal Compensation Principle (multi-tasking).

    D.    The basic adverse selection and screening model.  Applications to price discrimination, price/quality market segmentation, supply chain management, and credit rationing.

    E.     Incomplete contracts and institutional design.

    F.     Dynamics under full commitment.

     

    References

    Laffont, J. and Martimort, D. “The Theory of Incentives:  The Principal-Agent Model”

    Bolton, P. and Dewatripont, M. “Contract Theory”

    Hallock, K. and Murphy, K.  “The Economics of Executive Compensation”