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The Theory of Incentives : The Principal-Agent Model - Jean-Jacques Laffont

The Theory of Incentives

The Principal-Agent Model

Paperback Published: 26th December 2001
ISBN: 9780691091846
Number Of Pages: 440

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Economics has much to do with incentives--not least, incentives to work hard, to produce quality products, to study, to invest, and to save. Although Adam Smith amply confirmed this more than two hundred years ago in his analysis of sharecropping contracts, only in recent decades has a theory begun to emerge to place the topic at the heart of economic thinking. In this book, Jean-Jacques Laffont and David Martimort present the most thorough yet accessible introduction to incentives theory to date. Central to this theory is a simple question as pivotal to modern-day management as it is to economics research: What makes people act in a particular way in an economic or business situation? In seeking an answer, the authors provide the methodological tools to design institutions that can ensure good incentives for economic agents.

This book focuses on the principal-agent model, the "simple" situation where a principal, or company, delegates a task to a single agent through a contract--the essence of management and contract theory. How does the owner or manager of a firm align the objectives of its various members to maximize profits? Following a brief historical overview showing how the problem of incentives has come to the fore in the past two centuries, the authors devote the bulk of their work to exploring principal-agent models and various extensions thereof in light of three types of information problems: adverse selection, moral hazard, and non-verifiability. Offering an unprecedented look at a subject vital to industrial organization, labor economics, and behavioral economics, this book is set to become the definitive resource for students, researchers, and others who might find themselves pondering what contracts, and the incentives they embody, are really all about.

Industry Reviews

"Incentive theory is at the very core of economics. This text is a masterly exposition of the modern theory by one of the pioneers of the field, Jean-Jacques Laffont, together with one of its rising stars, David Martimort." - Eric Maskin, Institute for Advanced Study "This book will surely be the standard technical reference in an important field for a number of years - possibly for many if the field ceases to develop so rapidly. It is indeed a fine contribution to the economics literature." - Sir James Mirrlees, Cambridge University, 1996 Nobel Laureate in Economic Sciences "The most important development in economics in the last forty years has been the study of incentives to achieve potential mutual gains when the parties have different degrees of knowledge. The time is ripe for a synthesis and systematization. Jean-Jacques Laffont has been one of the most important contributors to the field over the years, and David Martimort has shown his capacity for highly original work. This book combines clarity, thoroughness, and great respect for historical development." - Kenneth J. Arrow, Stanford University, 1972 Nobel Laureate in Economic Sciences

Forewordp. xi
Introductionp. 1
Incentives in Economic Thoughtp. 7
Adam Smith and Incentive Contracts in Agriculturep. 8
Chester Barnard and Incentives in Managementp. 11
Hume, Wicksell, Groves: The Free-Rider Problemp. 14
Borda, Bowen, Vickrey: Incentives in Votingp. 15
Leon Walras and the Regulation of Natural Monopoliesp. 18
Knight, Arrow, Pauly: Incentives in Insurancep. 18
Sidgwick, Vickrey, Mirrlees: Redistribution and Incentivesp. 20
Dupuit, Edgeworth, Pigou: Price Discriminationp. 22
Incentives in Planned Economiesp. 23
Leonid Hurwicz and Mechanism Designp. 25
Auctionsp. 27
The Rent Extraction-Efficiency Trade-Offp. 28
The Basic Modelp. 32
The Complete Information Optimal Contractp. 33
Incentive Feasible Menu of Contractsp. 36
Information Rentsp. 39
The Optimization Program of the Principalp. 40
The Rent Extraction-Efficiency Trade-Offp. 41
The Theory of the Firm Under Asymmetric Informationp. 46
Asymmetric Information and Marginal Cost Pricingp. 48
The Revelation Principlep. 48
A More General Utility Function for the Agentp. 51
Ex Ante versus Ex Post Participation Constraintsp. 57
Commitmentp. 63
Stochastic Mechanismsp. 65
Informative Signals to Improve Contractingp. 68
Contract Theory at Workp. 72
Appendixp. 81
Incentive and Participation Constraints with Adverse Selectionp. 82
More than Two Typesp. 86
Multidimensional Asymmetric Informationp. 93
Type-Dependent Participation Constraint and Countervailing Incentivesp. 101
Random Participation Constraintp. 115
Limited Liabilityp. 118
Audit Mechanisms and Costly State Verificationp. 121
Redistributive Concerns and the Efficiency-Equity Trade-Offp. 130
Appendicesp. 134
Moral Hazard: The Basic Trade-Offsp. 145
The Modelp. 148
Risk Neutrality and First-Best Implementationp. 153
The Trade-Off Between Limited Liability Rent Extraction and Efficiencyp. 155
The Trade-Off Between Insurance and Efficiencyp. 158
More than Two Levels of Performancep. 163
Informative Signals to Improve Contractingp. 167
Moral Hazard and the Theory of the Firmp. 172
Contract Theory at Workp. 174
Commitment Under Moral Hazardp. 184
Appendicesp. 185
Incentive and Participation Constraints with Moral Hazardp. 187
More than Two Levels of Effortp. 191
The Multitask Incentive Problemp. 203
Nonseparability of the Utility Functionp. 226
Redistribution and Moral Hazardp. 232
Appendicesp. 235
Nonverifiabilityp. 240
No Contract at Date 0 and Ex Post Bargainingp. 242
Incentive Compatible Contractp. 244
Nash Implementationp. 246
Subgame-Perfect Implementationp. 256
Risk Aversionp. 261
Concluding Remarksp. 264
Mixed Modelsp. 265
Adverse Selection Followed by Moral Hazardp. 269
Moral Hazard Followed by Adverse Selectionp. 294
Moral Hazard Followed by Nonverifiabilityp. 298
Dynamics under Full Commitmentp. 303
Repeated Adverse Selectionp. 307
Repeated Moral Hazardp. 319
Constraints on Transfers: The Role of Implicit Incentivesp. 342
Limits and Extensionsp. 347
Informed Principalp. 351
Limits to Enforcementp. 360
Dynamics and Limited Commitmentp. 364
The Hold-Up Problemp. 370
Limits to the Complexity of Contractsp. 375
Limits in the Action Spacep. 387
Limits to Rational Behaviorp. 391
Endogenous Information Structuresp. 395
Referencesp. 399
Author Indexp. 413
Subject Indexp. 417
Table of Contents provided by Syndetics. All Rights Reserved.

ISBN: 9780691091846
ISBN-10: 0691091846
Series: International Studen
Audience: Tertiary; University or College
Format: Paperback
Language: English
Number Of Pages: 440
Published: 26th December 2001
Publisher: Princeton University Press
Country of Publication: US
Dimensions (cm): 25.4 x 17.9  x 2.9
Weight (kg): 0.89