An Introduction to the Economics of Information: Incentives and Contracts

An Introduction to the Economics of Information: Incentives and Contracts

An Introduction to the Economics of Information: Incentives and Contracts

An Introduction to the Economics of Information: Incentives and Contracts


This is an advanced textbook on the theory of contracting under asymmetric information, a key part of modern microeconomic theory. It examines the characteristics of optimal contracts when one party has certain relevant knowledge that the other party does not. The various problems are presented in the same framework to allow easy comparison of the different results. The authors indicate substantial real-world applications, and exercises for students (with solutions) are provided at the end of each chapter.

"It is a timely contribution to the discipline of Economics as a whole and in particular to Information Economics". -- Ian Jackson, Staffordshire University


The economics of information is possibly the area of economic theory that has evolved most over the past fifteen years. Developed in parallel with the new economics of Industrial Organization, its importance and applications have grown spectacularly. Its objective is to study the situations in which agents attempt to overcome their ignorance about some relevant information by taking decisions designed to acquire new information or to avoid some of the costs of their ignorance. When the information is asymmetrically distributed among agents, these decisions involve the designing of contracts intended to provide incentives and/or to induce the revelation of private information.

This book considers situations in which asymmetric information exists in a contractual relationship, that is to say, in which one participant knows something that another doesn't. We analyse three important themes: moral hazard, adverse selection, and signalling. The models in which these themes are studied allow us to explain a large number of economic situations, even though we do not analyse all the economic themes related to information. Our choice is based on the idea of looking at only a few themes but in enough depth for our readers to acquire a certain independence.

The book is organized in the following way. There are five chapters, the last three being dedicated to the above-mentioned themes. In Chapter 2 we present the symmetric information situation, the reference model, which serves as a necessary starting-point to understand the effects of each of the informational problems that follow. This chapter presents a base model in which the different problems are analysed. The homogeneous nature of this model has the advantage of allowing the results to be compared in a simple and natural way. The book begins with an introduction, in which the themes to be studied are presented together with several examples that show how the economics of information can be of interest.

Besides the examples contained in the principal text, each chapter has detailed applications of the models and their results. In these supplements, we present simple models with clear economic messages relating to interesting, and current themes (finance, insurance, technology transfer, firm regulation, public subsidies, etc.). Often, an application is a simplified version of an article published in a scientific journal and can be read quite independently from the . . .

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