Mechanism Design

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Mechanism Design and Contract Theory

Description: This is a topic class on information economics and contract theory. The purpose of the course is to give an introduction to some of the main topics in this field: adverse selection (signaling, screening), moral hazard, and mechanism design,

First, the course focuses on the role of private information in people’s incentives to work (or to shirk), to distinguish themselves and to communicate (or to lie). Second, it studies the question of how to design optimal mechanisms, compensation schemes and organizations given people’s private information. This course is more research oriented. The class requires some readings, class presentations and one term paper.

Reference books

•Mas-Colell, Whinston, & Green (MWG), 1995, MicroeconomicTheory.

•Fudenberg, D. and J. Tirole (1991), GameTheory, Cambridge: MIT Press.

Course Outline

1. Information economics

(a) Adverse Selection

(b) Signaling and Screening

(c) Reputation and Cheap Talk Games

(d) Non-linear Pricing

• MWG, Chapter 13.

• Akerlof, G. (1970), “The Market for Lemons: Quality and the Market Mecha­nism,” Quarterly Journal of Economics 84: 488-500.

• Spence, A. M. (1973), “Job Market Signaling,” Quarterly Journal of Economics.

• Crawford, V., and J. Sobel (1982), “Strategic Information Transmission,” Econo­metrica 50: 1431-51.

• Cremer, J. (1995), “Arm’s Length Relationships,” Quarterly Journal of Eco­nomics, CX (2).

2. Contract theory

(a) Moral Hazard and Optimal Incentive Contract (2)

(b) Dynamic Moral Hazard (2)

(c) Implicit Incentive and Career Concerns (1)

(d) Property Right and Incomplete Contract Theory (2)

• MWG, Chapter 14.

• Grossman, S. and O. Hart (1983), “An Analysis of the Principal-Agent Problem,” Econometrica 51: 7-45.

• Holmstrom, B. (1982), “Moral Hazard in Teams,” Bell Journal of Economics, 13: 324-340.

• Holmstrom, B. and P. Milgrom (1987), “Aggregation and Linearity in the Provi­sion of Intertemporal Incentives,” Econometrica, 55(2) p 303-328.

• Dewatripont, M., I. Jewitt and J. Tirole (1997), “Information Structures and Career Concerns,” ECARE mimeo.

• Dewatripont, M., I. Jewitt and J. Tirole (1997), “Missions and Accountability of Government Agencies,” ECARE mimeo.

• Holmstrom, B. (1982) “Managerial Incentive Problems: A Dynamic Perspective,” in Essays in Economics and Management in Honor of Lars Wahlbeck.

• Hart, O. and J. Moore (1988), “Incomplete Contracts and Renegotiation,” Econo­metrica, 56, 755-785.

• Hermalin, B. and M. Katz (1991), “Moral Hazard and Verifiability,” Economet­rica, 59: 1735-1754.

• Hart, O. and J. Moore (1998), “Foundations of Incomplete contracts,” Review of Economics Studies, Vol 66 (1), 115-138.

• Tirole, J. (1998), “Incomplete Contracts: Where Do We Stand?” Econometrica, Vol 67(4), 741-781.

3. Mechanism Design and Auctions (4)

(a) Basic Mechanism Design (1-2)

(b) Efficient Mechanism (1)

(c) Auction: (1-2)


• MWG, Chapter 23.

• Fudenberg, D. and J. Tirole (1991), Chapter 7.

• Milgrom, P. and R. Weber (1982), “A Theory of Auctions and Competitive Bid-ding,”Econometrica 50(5):1089-1122.

• Myerson, Roger and M. Satterthwaite (1983), “Efficient Mechanisms for Bilateral Trading,” Journal of Economic Theory, 29: 265-281.
A more detailed reading list is as following:
I. Incentives
A. Introduction

*W Lazear, Edward. 2000. "Performance Pay and Productivity." American Economic Review 90: 1346-61.

Shearer, Bruce. 2004. "Piece Rates, Fixed Wages and Incentives: Evidence from a Field Experiment." Review of Economic Studies 71: 513-34.

Kane, Thomas and Douglas Staiger. 2002. "The Promise and Pitfalls of Using Imprecise School Accountability Measures." Journal of Economic Perspectives 16: 91-114.

Courty, Pascal, and Gerald Marschke. 2004. "An Empirical Investigation of Gaming Responses to Explicit Performance Incentives." Journal of Labor Economics 22: 23-56.

Oyer, Paul. 1998. "Fiscal Year Ends and Nonlinear Incentive Contracts: The Effect on Business Seasonality." Quarterly Journal of Economics 113:149-85.

Chevalier, Judith, and Glen Ellison. 1997. "Risk Taking by Mutual Funds as a Response to Incentives." Journal of Political Economy 105:1167-1200.

Cragg, Michael. 1997. "Performance Incentives in the Public Sector: Evidence from the Job Training Partnership Act." Journal of Law, Economics, and Organization 13:147-68.

Brown, Keith, W. Harlow, and Laura Starks. 1996. "Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry." Journal of Finance 51:85-110.

Asch, Beth. 1990. "Do Incentives Matter? The Case of Navy Recruiters." Industrial and Labor Relations Review 43:S89-106.

Healy, Paul. 1985. "The Effect of Bonus Schemes on Accounting Decisions," Journal of Accounting and Economics 7:85-107.

Alston, Lee, and Robert Higgs. 1982. "Contractual Mix in Southern Agriculture since the Civil War: Facts, Hypotheses, and Test." Journal of Economic History 42:327-53.

Kerr, Steven. 1975. "On the Folly of Rewarding A, While Hoping for B." Academy of Management Journal 18:769-83.
B. Formal Contracts

1. Multi-tasking

*P Holmstrom, Bengt, and Paul Milgrom. 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design." Journal of Law, Economics, and Organization 7:24-52.

Baker, George. 1992. "Incentive Contracts and Performance Measurement." Journal of Political Economy 100:598-614.

Feltham, Gerald and Jim Xie. 1994. "Performance Measure Congruity and Diverstiy in Multi-Task Principal/Agent Relations." The Accounting Review 69: 429-53.

Datar, Srikant, Susan Kulp, and Richard Lambert. 2001. "Balancing Performance Measures." Journal of Accounting Research 39: 75-92

*W Baker, George. 2002. "Distortion and Risk in Optimal Incentive Contracts." Journal of Human Resources 37: 728-51.

Fehr, Ernst and Klaus Schmidt. 2003. "Fairness and Incentives in a Multi-Task Principal-Agent Model." mimeo, University of Zurich.

Brickley, James and Jerold Zimmerman. 2001. "Changing Incentives in a Multitask Environment: Evidence from a Top-tier Business School." Journal of Corporate Finance 7: 367-396.

Cockburn, Ian, Rebecca Henderson, and Scott Stern. 2002. "Balancing Incentives: The Tension Between Basic and Applied Research." Unpublished manuscript, MIT.

2. Risk-aversion

Holmstrom, Bengt. 1979. "Moral Hazard and Observability." Bell Journal of Economics 10:74-91.

Milgrom, Paul. 1981. "Good News and Bad News: Representation Theorems and Applications." Bell Journal of Economics 12: 380-91

Grossman, Sanford and Oliver Hart. 1983. "An Analysis of the Principal-Agent Problem." Econometrica 51: 7-45.

Hart, Oliver and Bengt Holmstrom. 1987. "The Theory of Contracts." In T. Bewley (ed.), Advances in Economic Theory. Cambridge: Cambridge University Press.

Holmstrom, Bengt, and Paul Milgrom. 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives." Econometrica, 55:303-328.

Banker, Rajiv, and Srikant Datar. 1989. "Sensitivity, Precision, and Linear Aggregation of Signals for Performance Evaluation." Journal of Accounting Research 27: 21-39.

Holmstrom, Bengt, and Paul Milgrom. 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design." Journal of Law, Economics, and Organization 7:24-52.

*W Prendergast, C. 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy 110: 1071-1102.

Prendergast, Canice. 2002. "Uncertainty and Incentives." Journal of Labor Economics 20: S115-37.

Raith, Michael. 2003. "Competition, Risk, and Managerial Incentives." American Economic Review 93: 1425-36.

Baker, George and Bjorn Jorgensen. 2003. "Volatility, Noise, and Incentives." Unpublished manuscript, HBS.

Ackerberg, D. and M. Botticini. 2002. "Endogenous Matching and the Empirical Determinants of Contract Form." Journal of Political Economy Vol 110, No 3, 564-591.
C. Relational Contracts

1. Introduction

Macaulay, Stewart. 1963. "Non Contractual Relations in Business: A Preliminary Study." American Sociological Review 28: 55-67.

Macneil, Ian. 1978. "Contracts: Adjustments of long-term economic relations under classical, neoclassical, and relational contract law." Northwestern University Law Review. 192: 854-906.

Goldberg, Victor. 1980. "Relational Exchange." American Behavioral Scientist 23: 337-52.

Macneil, Ian. 1985. "Relational Contract: What We Do and Do Not Know." Wisconsin Law Review 3: 483-526.

McMillan, John, and Christopher Woodruff. 1999. "Dispute Prevention Without Courts in Vietnam." Journal of Law, Economics, and Organization 15: 637-58.

Hayes, Rachel and Scott Schaefer. 2000. "Implicit contracts and the Explanatory Power of Top Executive Compensation for Future Performance." RAND Journal of Economics 31: 273-93

2. Core Theory

*W Bull, Clive. 1987. "The Existence of Self-Enforcing Implicit Contracts." Quarterly Journal of Economics 102:147-59.

MacLeod, Bentley and James Malcomson. 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment." Econometrica 57: 447-80.

MacLeod, Bentley and James Malcomson. 1998. "Motivation and Markets." American Economic Review 88:388-411.

*W Levin, Jonathan. 2003. "Relational Incentive Contracts." American Economic Review 93: 835-57.

Brown, Martin, Armin Falk, and Ernst Fehr. 2004. "Relational Contracts and the Nature of Market Interactions." Econometrica 72: 747-80.

3. Elaborations

*W Baker, George, Robert Gibbons, and Kevin J. Murphy. 1994. "Subjective Performance Measures in Optimal Incentive Contracts." Quarterly Journal of Economics 109:1125-56.

Pearce, David and Ennio Stacchetti. 1998. "The Interaction of Implicit and Explicit Contracts in Repeated Agency." Games and Economic Behavior 23: 75-96.

*W Che, Yeon-Koo, and Seung-Weon Yoo. 2001. "Optimal Incentives for Teams." American Economic Review 91: 525-41.

Levin, Jonathan. 2002. "Multilateral Contracting and the Employment Relationship." Quarterly Journal of Economics 117: 1075-1103.

Ramey, Garey, and Joel Watson. 1997. "Contractual Fragility, Job Destruction, and Business Cycles." Quarterly Journal of Economics 112:873-911.

Watson, Joel. 1999. "Starting Small and Renegotiation." Journal of Economic Theory 85: 52-90.

Watson, Joel. 2002. "Starting Small and Commitment." Games and Economic Behavior 38: 176-99.

Rauch, James and Joel Watson. 2003. "Starting small in an unfamiliar environment." International Journal of Industrial Organization 21: 1021-42.

Rayo, Luis. 2003. "Relational Team Incentives and Ownership." Unpublished manuscript, University of Chicago.

D. Career Concerns, Reputation, and the Ratchet Effect (Sept. 27, 29)

1. Career Concerns

*W Holmstrom, Bengt. 1982. "Managerial Incentive Problems--A Dynamic Perspective." Republished in Review of Economic Studies 66 (1999): 169-82.

Dewatripont, Mathias, Ian Jewitt, and Jean Tirole. 1999. "The Economics of Career Concerns, Part I: Comparing Information Structures." Review of Economic Studies 66: 183-98.

Holmstrom, Bengt and Joan Ricart I Costa. 1986. "Managerial Incentives and Capital Management." Quarterly Journal of Economics 101: 835-60.

Fudenberg, Drew and Jean Tirole. 1986. "A 'Signal-Jamming' Theory of Predation." Rand Journal of Economics 17: 366-76.

Stein, Jeremy. 1989. "Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior." Quarterly Journal of Economics 104: 655-669.

Gibbons, Robert, and Kevin J. Murphy. 1992. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence." Journal of Political Economy 100:468-505.

Gompers, Paul, and Josh Lerner. 1999. "An Analysis of Compensation in the U.S. Venture Capital Partnership." Journal of Financial Economics 51: 3-44.

Chevalier, Judith and Glenn Ellison. 1999. "Career Concerns of Mutual Fund Managers." Quarterly Journal of Economics 114: 389-432.

Milbourn, Todd, Richard Shockley, and Anjan Thakor. 2001. "Managerial career concerns and investments in information." RAND Journal of Economics 32: 334-51.

Auriol, Emmanuelle, Guido Friebel, and Lambros Pechlivanos. 2002. "Career Concerns in Teams." Journal of Labor Economics 20: 289-307.

2. Reputation

*W Diamond, Douglas. 1989. "Reputation Acquisition in Debt Markets." Journal of Political Economy 97: 828-62.

Boot, Arnoud, Stuart Greenbaum, and Anjan Thakor. 1993. "Reputation and Discretion in Financial Contracting." American Economic Review 83: 1165-83.

Tirole, Jean. 1996. "A Theory of Collective Reputations (with applications to the persistence of corruption and to firm quality)." Review of Economic Studies 63:1-22.

Banerjee, Abhijit and Esther Duflo. 2000. "Reputation Effects and the Limits of Contracting: A Study of the Indian Software Industry." Quarterly Journal of Economics 115: 989-1017.

Tadelis, Steven. 1999. "What's in a Name? Reputation as a Tradeable Asset." American Economic Review 89: 548-63.

Tadelis, Steven. "The Market for Reputations as an Incentive Mechanism." Journal of Political Economy 110 (4), 854-82.

3. The Ratchet Effect

Freixas, Xavier, Jean-Jacques Laffont, and Jean Tirole. 1985. "Planning Under Incomplete Information and the Ratchet Effect." Review of Economic Studies 52: 173-91.

Lazear, Edward. 1986. "Salaries and Piece Rates." Journal of Business 59:405-431.

*W Gibbons, Robert. 1987. "Piece-Rate Incentive Schemes." Journal of Labor Economics 5 :413-29.

Laffont, Jean-Jacques and Jean Tirole. 1988. "The Dynamics of Incentive Contracts." Econometrica 56: 1153-75.

Kanemoto, Yoshitsugu, and Bentley MacLeod. 1992. "The Ratchet Effect and the Market for Secondhand Workers." Journal of Labor Economics 10:85-98.

Carmichael, Lorne, and Bentley MacLeod. 2000. "Worker Cooperation and the Ratchet Effect." Journal of Labor Economics 18: 1-19.

Meyer, Margaret and John Vickers. 1997. "Performance Comparisons and Dynamic Incentives." Journal of Political Economy 105: 547-81.
II. Decision Rights

A. Classics

*W Williamson, Oliver. 1971. "The Vertical Integration of Production: Market Failure Considerations." American Economic Review 61: 112-23.

Alchian, Armen and Harold Demsetz. 1972. "Production, Information Costs, and Economic Organization." American Economic Review 62: 777-95.

Klein, Benjamin, Robert Crawford, and Armen Alchian. 1978. "Vertical Integration, Appropriable Rents and the Competitive Contracting Process." Journal of Law and Economics XXI: 297-326.

Williamson, Oliver. 1979. "Transaction Cost Economics: The Governance of Contractual Relations." Journal of Law and Economics 22: 233-61.

Monteverde, Kirk and David Teece. 1982. "Supplier Switching Costs and Vertical Integration in the Automobile Industry." Bell Journal of Economics 13:206-13.

Anderson, Erin and David Schmittlein. 1984. "Integration of the Sales Force: An Empirical Examination." Rand Journal of Economics 15: 385-95.

Masten, Scott. 1984. "The Organization of Production: Evidence from the Aerospace Industry." Journal of Law and Economics 27: 403-17.

Joskow, Paul. 1985. "Vertical Integration and Long-Term Contracts: The Case of Coal-Burning Electric Generation Plants." Journal of Law, Economics, and Organization 1: 33-80.

Joskow, Paul. 1987. "Contract Duration and Relationship-Specific Investment: Empirical Evidence from Coal Markets." American Economic Review 77:168-85.

Masten, Scott, James Meehan, and Edward Snyder. 1991. "The Costs of Organization." Journal of Law, Economics, and Organization. 7: 1-25.

Williamson, Oliver. 2002. "The Theory of the Firm as Governance Structure: From Choice to Contract." Journal of Economic Perspectives 16: 171-95.

*W Gibbons, Robert. 2004. "Four Formal(izable) Theories of the Firm." Forthcoming in Journal of Economic Behavior and Organization.

B. Ex Ante Incentives

*W Grossman, S. and O. Hart (1986), "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration." Journal of Political Economy 94(4): 691-719.

Hart, O. and J. Moore (1990), "Property Rights and the Nature of the Firm." Journal of Political Economy 98 (6): 1119-1158.

Hart, Oliver. 1995. "The Property Rights Approach," and "Further Issues Arising from the Property Rights Approach." Chapters 2-3 in Firms, Contracts, and Financial Structure. Oxford University Press.

Maskin, Eric, and Jean Tirole. 1999. "Two Remarks on the Property-Rights Literature." Review of Economic Studies 66: 139-49.

Holmstrom, Bengt and Paul Milgrom. 1994. "The Firm as an Incentive System." American Economic Review 84: 972-91.

*W Holmstrom, Bengt. 1999. "The Firm as a Subeconomy." Journal of Law, Economics, and Organization. 15: 74-102.

*W Whinston, Michael. 2002. "On the Transaction Cost Determinants of Vertical Integration." Journal of Law, Economics, and Organization 19: 1-23.

*W Baker, George, Robert Gibbons, and Kevin J. Murphy. 2002. "Relational Contracts and the Theory of the Firm." Quarterly Journal of Economics 117: 39-83.

C. Ex Post Control (Oct. 13, 20, 25) [No class Oct. 18 - Sloan Activities]

*W Hart, Oliver, and Bengt Holmstrom. 2002. "A Theory of Firm Scope." Unpublished manuscript, Harvard University

*W Bajari, Patrick and Steven Tadelis. 2001. "Incentive versus Transaction Costs: A Theory of Procurement Contracts." RAND Journal of Economics 32: 387-407.

Tadelis, Steven. 2002. "Complexity, Flexibility, and the Make-or-Buy Decision." American Economic Review 92: 433-37.

Matouschek, Niko. 2004. "Ex Post Inefficiencies in a Property Rights Theory of the Firm." Journal of Law, Economics, and Organization 20: 125-47.

Klein, Benjamin. 1996. "Why Hold-ups Occur: The Self-Enforcing Range of Contractual Relationships." Economic Inquiry 34: 444-63.

*W Klein, Benjamin and Kevin Murphy. 1997. "Vertical Integration as a Self-Enforcing Contractual Arrangement," American Economic Review, 87:2, 415-20.

Klein, Benjamin. 2000. "The Role of Incomplete Contracts in Self-Enforcing Relationships." Revue D'蒫onomie Industrielle 92: 67-80.

*W Baker, George, Robert Gibbons, and Kevin J. Murphy. 2004. "Contracting for Control: Decision Rights, Payoff Rights, and Relational Contracts in Firms, Contracts, and Other Governance Structures." Unpublished manuscript, MIT.

D. Recent Evidence (Oct. 27)

Lerner, Josh and Robert Merges. 1998. "The Control of Technology Alliances: An Empirical Analysis of the Biotechnology Industry." Journal of Industrial Economics 46: 125-56.

Arru馻da, Benito, Luis Garicano, and Luis V醶quez. 2001. "Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution." Journal of Law, Economics, and Organization 17: 257-84.

*W Baker, George and Thomas Hubbard. 2003. "Make Versus Buy in Trucking: Asset Ownership, Job Design, and Information." American Economic Review 93: 551-572.

Elfenbein, Daniel, and Josh Lerner. 2003. "Ownership and control rights in Internet portal alliances, 1995-1999." RAND Journal of Economics 34: 356-69.

Lerner, Josh, Hilary Shane, and Alexander Tsai. 2003. "Do equity financing cycles matter? Evidence from biotechnology alliances." Journal of Financial Economics 67: 411-46.

Kalnins, Arturs and Kyle Mayer. 2004. "Relationships and Hybrid Contracts: An Analysis of Contract Choice in Information Technology." Journal of Law, Economics, and Organization 20: 207-29.

Corts, Kenneth and Jasjit Singh. 2004. "The Effect of Repeated Interaction on Contract Choice: Evidence from Offshore Drilling." Journal of Law, Economics, and Organization 20: 230-60.

Azoulay, Pierre. 2004. "Acquiring Knowledge Within and Across Firm Boundaries: Evidence from Clinical Development." Forthcoming in American Economic Review.

Robinson, David, and Toby Stuart. 2002. "Just How Incomplete Are Incomplete Contracts? Evidence from Biotech Strategic Alliances." Unpublished manuscript, Columbia University.

III. Dynamic Contracting

A. Renegotiation and Incomplete Contracting

*W Hart, Oliver, and John Moore. 1988. "Incomplete Contracts and Renegotiation." Econometrica 56: 755-85.

Aghion, Philippe, Mathias Dewatripont and Patrick Rey. 1994. "Renegotiation Design with Unverifiable Information." Econometrica 62: 257-282.

*W Noldeke, Georg and Klaus M. Schmidt. 1995. "Option Contracts and Renegotiation: A Solution to the Hold-up Problem." RAND Journal of Economics 26(2): 163-179.

Che, Yeon-Koo and Donald Hausch. 1999. "Cooperative Investments and the Value of Contracting." American Economic Review 89: 125-47.

Edlin, Aaron and Benjamin Hermalin. 2000. "Contract Renegotiation and Options in Agency Problems." Journal of Law, Economics, and Organization 16: 395-423.

Hermalin, Benjamin and Michael Katz. 1991. "Moral Hazard and Verifiability: The Effects of Renegotiation in Agency." Econometrica 59(6): 1735-1753.

Bernheim, Douglas, and Michael Whinston. 1998. "Incomplete Contracts and Strategic Ambiguity." American Economic Review 88: 902-32.
B. Dynamic Risk-Sharing and Agency (Nov. 8, 10)

*P Bolton, P. and M. Dewatripont (2001), Introduction to Contract Theory, Chapter 10 (Dynamic Moral Hazard).

Harris, M. and B. Holmstrom. 1982. "A Theory of Wage Dynamics." Review of Economic Studies 49: 315-333.

*W Hendel, I. and A. Lizzeri. 2003. "The Role of Commitment in Dynamic Contracting: Evidence from Life Insurance." Quarterly Journal of Economics 118: 299-328.

J. Thomas and T. Worrall, "Self-Enforcing Wage Contracts." Review of Economic Studies Vol 55, Issue 4, Oct 1988: 541-553.

E. Ligon, J. Thomas and T. Worrall, "Informed Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies." Review of Economic Studies Vol 69, Issue 1, Jan 2002.

Rogerson, W. 1985. "Repeated Moral Hazard." Econometrica 53: 69-76.

*P Chiappori, P.A., I. Macho, P.Rey and B. Salanie (1994), "Repeated Moral Hazard: The Role of Memory, Commitment and the Access to Credit Markets," European Economic Review 38(8), 1527-53.

Fudenberg, D., Holmstrom, B. and P. Milgrom (1990), "Short Term Contracts and Long Term Agency Relationships," Journal of Economic Theory, 51(1).

Malcomson, J. and F. Spinnewyn (1988), "The Multi-Period Principal-Agent Problem," Review of Economic Studies, 55(3): 391-407.

Guriev, S. and D. Kvassov (2003), "Contracting on Time," mimeo, Penn State University.

Dewatripont, M. and E. Maskin. 1990. "Contract renegotiation in models of asymmetric information." European Economic Review 34: 311-321.

Fudenberg, D. and J. Tirole (1992), "Moral Hazard and Renegotiation in Agency Contracts," Econometrica 58(6): 1279-1319.

Hart, O. and J. Tirole (1988), "Contract Renegotiation and Coasian Dynamics," Review of Economic Studies, 55: 509-540.

C. Dynamic Financial Contracts (Nov. 15, 17, 19)

Bolton, P and M. Dewatripont , Introduction to Contract Theory. Chapter 10.

1. Contingent control rights

Hart, O. (l995), Firms, Contracts, and Financial Structure, Ch 5, Oxford University Press.

*W Aghion, P., and P. Bolton (1992), "An 'Incomplete Contracts' Approach to Financial Contracting." Review of Economic Studies 59:473-94.

*W Kaplan, S., and P. Stromberg (2002), "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts." Review of Economic Studies 70: 281-315.

Hart, O., and J. Moore (1994), "A Theory of Debt Based on the Inalienability of Human Capital." Quarterly Journal of Economics l09:84l-79.

2. Multiple claims

Diamond, D. (1991), "Debt Maturity Structure and Liquidity Risk." Quarterly Journal of Economics 106:709-37.

*P Hart, O. (2001), "Financial Contracting." Journal of Economic Literature 39(4), 1079-1100.

Hart, O., and J. Moore (1998), "Default and Renegotiation: A Dynamic Model of Debt." Quarterly Journal of Economics 113:1-41.

Bergl鰂, E., and E.L. von Thadden (l994), "Short-term versus Long-Term Interests: Capital Structure with Multiple Investors." Quarterly Journal of Economics 109:1055-84.

3. Corporate governance

*W Hermalin, B. and M. Weisbach (1998), "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," American Economic Review, 88 (1): 96-118.

*W Fudenberg, D. and J. Tirole (1995), "A Theory of Income and Dividend Smoothing Based on Incumbency Rents," Journal of Political Economy, 103: 75-93.

Bergstresser, D. and T. Philippon (2003), "CEO Incentives and Earnings Management: Evidence from the 1990s," mimeo, Harvard Business School.

Tirole, J. (2001), "Corporate Governance," Econometrica, 69 (1): 1-35.

Holmstrom, B. and S. Kaplan (2001), "Corporate Governance and Merger Activity in the United States: Making Sense of the 1980s and 1990s." Journal of Economic Perspectives, 15 (2): 121-144.

4. Entrepreneurial finance

Bergemann, D. and U. Hege (2001), "The Financing of Innovation: Learning and Stopping," CFDP 1292, Yale University.

Bergemann, D. and U. Hege (2002), "The Value of Benchmarking," CFDP 1379, Yale University

Amador, M. and A. Landier (2002), "Entrepreneurial Pressure, Innovation and Rent Cannibalization," mimeo, MIT.

IV. Multi-Agent Contracting

A. Mechanism Design (Nov 22, 24, 29)

Bolton, P. and M. Dewatripont (2001), Introduction to Contract Theory, Chapter 7 (Multilateral Asymmetric Information: Bilateral Trading and Auctions).

MasColell, A., M. Whinston, and J. Green. 1995. Microeconomic Theory. New York: Oxford University Press. Chapter 23.

Milgrom, P. Putting Auction Theory to Work. Cambridge: Cambridge University Press. (Part I: The Mechanism Design Approach).

1. Vickrey-Clark-Groves mechanisms

Groves, T. (1973), "Incentives in Teams," Econometrica, 41: 617-631.

*W Holmstrom, B (1979), "Groves' Scheme on Restricted Domains," Econometrica, 47: 1137-1144.

d'Aspremont, C. and L. Gerard-Varet (1979), "Incentives and Incomplete Information." Journal of Public Economics 11: 24-45.

2. Optimal mechanism design

*P Myerson, R. and M. Satterthwaite. 1983. "Efficient Mechanisms for Bilateral Trading," Journal of Economic Theory 29: 265-281.

Myerson, R. (1981), "Optimal Auction Design," Mathematics of Operations Research, 6: 58-73.

Holmstrom, B. and R. Myerson (1983), "Efficient and Durable Decision Rules with Incomplete Information." Econometrica 51(6): 1799-1820.

Townsend, R. and E. Prescott (1984). "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, 52(1) : 21-46.

3. Partial mechanism design

Aghion, P. and P. Bolton (2003), "Incomplete Social Contracts." Journal of the European Economic Association Vol 1 (1).

Milgrom P. and J. Roberts (1986), "Relying on the Information of Interested Parties," Rand Journal of Economics, 17.

B. Moral Hazard in Teams

*P Bolton, P. and M. Dewatripont (2001), Introduction to Contract Theory (manuscript), Chapter 8 (Multiagent Moral Hazard and Collusion)

Holmstrom, B. (1982), "Moral Hazard in Teams," Bell Journal of Economics, 13: 324-40.

Legros P. and S. Matthews (1993), "Efficient and Nearly Efficient Partnerships," Review of Economic Studies, 60 (3): 599-611.

Battaglini, M. (2004), "Joint Production in Teams," mimeo, Princeton University.

C. Common Agency

*W Bernheim, B. D. and M. Whinston (1986), "Common Agency." Econometrica 54(4): 923-42.

Dixit, A., G. Grossman and E. Helpman (1997), "Common agency and coordination: General theory and application to government policymaking." Journal of Political Economy 105(4), August, 752-769.
D. Collusion and Cooperation

Tirole, J. (1992), "Collusion and the Theory of Organizations," in J.-J. Laffont (ed.), Advances in Economic Theory: Sixth World Congress, Volume 2, Econometric Society, Cambridge: Cambridge University Press, 151-206.

Tirole, Jean. 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations." Journal of Law, Economics, and Organization 2:181-214.

*P Holmstrom, B. and P. Milgrom (1990), "Regulating Trade Among Agents." Journal of Institutional and Theoretical Economics 146(1): 85-105.

Itoh, H. (1991), "Incentives to Help in Multi-Agent Situations." Econometrica 59(3): 611-636.

Kofman, A. and J. Lawarree (1993), "Collusion in Hierarchical Agency." Econometrica 61, 629-56.

Knez, Marc, and Duncan Simester. 2001. "Firm-Wide Incentives and Mutual Monitoring at Continental Airlines." Journal of Labor Economics 19: 743-72.
E. Contract Externalities

*W Aghion, Philippe. and Patrick Bolton. 1987. "Contracts as a Barrier to Entry." American Economic Review 77: 388-401.

Segal, Ilya. 1999. "Contracting with Externalities." Quarterly Journal of Economics 114: 337-88.

Gemicot, G. and D. Rey (2003), "Contract and Externalities: How Things Fall Apart" University of California Irvine.

F. Tournaments

*W Lazear, Edward, and Sherwin Rosen. 1981. "Rank-Order Tournaments as Optimum Labor Contracts." Journal of Political Economy 89: 841-864.

Kandel, Eugene, and Edward Lazear. 1992. "Peer Pressure and Partnership." Journal of Political Economy 100:801-17.

Lazear, Edward. 1989. "Pay Equality and Industrial Politics." Journal of Political Economy 97:561-80.

Eriksson, Tor. 1999. "Executive Compensation and Tournament Theory: Empirical Tests on Danish Data." Journal of Labor Economics 17: 262-80.

Barron, John, and Kathy Paulson Gjerde. 1997. "Peer Pressure in an Agency Relationship." Journal of Labor Economics 15:234-54.

V. Non-Financial Motives in Agency (Dec 6, 8)

A. Intrinsic Motivation.

*W Besley, T. and M. Ghatak (2003), "Competition and Incentives with Motivated Agents," mimeo, London School of Economics.

Murdock, K. (2002), "Intrinsic Motivation and Optimal Incentive Contracts," Rand Journal of Economics, 33 (4): 650-671.

Akerlof, G. and R. Kranton (2003), "Identity and the Economics of Organization," mimeo, University of Maryland..

Benabou, R. and J. Tirole (2003), "Intrinsic and Extrinsic Motivation," Review of Economic Studies, 70(3): 489-580.

Alesina, A. and G. Tabellini (2003), "Bureaucrats and Politicians," mimeo, Harvard University.

Seabright, P. (2002), "Blood, Bribes and the Crowding-Out of Altruism by Financial Incentives," mimeo, University of Toulouse.

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