The Theory of Incentives: The Principal-Agent Model

By Jean-Jacques Laffont; David Martimort | Go to book overview

Introduction

It is surprising to find that Schumpeter (1954) does not mention the word “incentives’ in his monumental history of economic thought.Today, for many economists, economics is to a large extent a matter of incentives: incentives to work hard, to produce good quality products, to study, to invest, to save, etc. How to design institutions that provide good incentives for economic agents has become a central question of economics.

Maybe Schumpeter’s omission arose because, when he was writing, economics was mostly concerned with understanding the theory of value in large economies. For that purpose, neoclassical economics in particular postulates rational individual behavior in the market.In a perfectly competitive market, this assumption translates into profit maximization for firms’ owners, which implies cost minimization.In other words, the pressure of competitive markets solves the problem of incentives for cost minimization. Similarly, consumers faced with exogenous prices have the proper incentives for maximizing their utility levels.The major project of understanding how prices are formed in competitive markets can proceed without worrying about incentives.

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The Theory of Incentives: The Principal-Agent Model
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Foreword xi
  • Introduction 1
  • 1 - Incentives in Economic Thought 7
  • 2 - The Rent Extraction-Efficiency Trade-Off 28
  • 3 - Incentive and Participation Constraints with Adverse Selection 82
  • 4 - Moral Hazard: the Basic Trade-Offs 145
  • 5 - Incentive and Participation Constraints with Moral Hazard 187
  • 6 - Nonverifiability 240
  • 7 - Mixed Models 265
  • 8 - Dynamics under Full Commitment 303
  • 9 - Limits and Extensions 347
  • References 399
  • Author Index 413
  • Subject Index 417
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