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