This course is a sequel to the course Game Theory with Applications to
Finance and Marketing, I, and it will review the major ingredients of contract
theory. The intended audiences are graduate students who have taken Game
Theory with Applications to Finance and Marketing, I or some graduatelevel
game theory course, and who are interested in applying game theory
to contract and institution design in the fields of finnance and/or marketing.
We shall selectively cover some topics in the two books below:
1. Jean-Jacques Laffont and David Martimort, 2002, The Theory of Incentives,
New Jersey: Princeton University Press.
2. Oliver Hart, 1995, Firms, Contracts, and Financial Structure, London:
Oxford University Press.
We shall cover chapters 2,3,4,8,and 9 in Laffont and Martimort (2002)
and several chapters of Hart (1995). The following is an overview of the
materials in Laffont and Martimort (2002) to be covered in this course.
1. Chapters 2 and 3 cover static adverse selection problem. Chapter 2
lays out the basic problem with the informed agent having two types.
It proves the revelation principle and applies it to various problems
in section 2.15. It emphasizes the different roles of ex-ante and expost
participation constraints, and briefly considers random schemes.
Chapter 3 considers an informed agent with more than 2 types, with
multi-dimensional private information, or with type-dependent or random
participation constraint. The materials there are then applied to the costly state verification (CSV) financial contracting problem.
2. Chapter 4 considers the static moral hazard problem. Chapter 4 considers
an agent who is either risk averse or is risk neutral but protected
by limited liability. In this chapter, the agent has two effort choices,
and is delegated with a single task. The theory has various applications
in section 4.8, and it is related to the theory of the firm.
3. Chapter 8 considers repeated adverse selection.
4. Chapter 9 considers incomplete contracts and the hold-up problem.
There will be homework assignments due regularly, which together with an inclass
midterm and oral presentation (of an assigned paper in either finance or
marketing) determine a student’s grade. The following is a tentative schedule.
Week no. Contents
1 Chapter 2 of LM
2 Chapter 2 of LM continued
3 Chapter 3 of LM
4 Chapter 3 of LM continued
5 Chapter 4 of LM
6 Chapter 4 of LM continued
7 Chapter 8 of LM
8 Chapter 8 of LM continued
9 Chapter 9 of LM continued
10 Midterm Examination
11-16 Hart’s Book
17-18 Oral Presentation