- 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”