The Theory of Incentives: The Principal-Agent Model

The Theory of Incentives: The Principal-Agent Model

The Theory of Incentives: The Principal-Agent Model

The Theory of Incentives: The Principal-Agent Model

Synopsis

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 essenceof management and contract theory. How does the owner or manager of a firm align the objectives of its various members to maximize profits? Foll

Excerpt

The development of the theory of incentives has been a major advance in economics in the last thirty years. The objective of this book is to provide easy access to this theory for undergraduate and first-year graduate students in economics. Our goal is not to be as complete as possible in covering and surveying the many contributions that have flourished in the realm of incentive theory. Instead, our contribution is methodological and intended to offer students some initial clues for analyzing the issues raised by this theory. As much as possible we have favored the simplest models to explain the core of the theory. The exposition has been divided into three books for methodological clarity. This volume presents the basic principal-agent theory with complete contracts. It allows a first exposition of the transaction costs created by contracting under asymmetric information without having to appeal to sophisticated game theory concepts.

The book allows for two levels of reading. Certain sections in some chapters are marked with a star to the right of the section head. A first reading should concentrate on the non-starred sections. These sections are accessible to readers who have a simple knowledge of maximization with inequality constraints. Most essential economic lessons can be understood from this first level of reading. Covering the starred sections will enable students to manipulate the concepts for better . . .

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