Skip to main content
SpringerLink
Log in

Contract Theory

  • Reference work entry
  • First Online:
The New Palgrave Dictionary of Economics

  • 93 Accesses

Abstract

This article offers a brief overview of contract. It focuses on the theory of complete contracts and the three associated paradigms of adverse selection, moral hazard and non-verifiability. By showing difficulties in allocating resources between asymmetrically informed partners, contract theory has deeply changed our view of the functioning of organizations and markets.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 6,499.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Hardcover Book
USD 8,499.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Bibliography

  • Armstrong, M., and J. Rochet. 1999. Multidimensional screening: A user’s guide. European Economic Review 43: 959–979.

    Article  Google Scholar 

  • Bagnoli, M., and T. Bergstrom. 2005. Log-concave probability and its applications. Economic Theory 26: 445–469.

    Article  Google Scholar 

  • Baron, D., and D. Besanko. 1984. Regulation and information in a continuing relationship. Information Economics and Policy 1: 447–470.

    Article  Google Scholar 

  • Baron, D., and R. Myerson. 1982. Regulating a monopolist with unknown costs. Econometrica 50: 911–930.

    Article  Google Scholar 

  • Crémer, J., and R. McLean. 1988. Full extraction of surplus in Bayesian and dominant strategy auctions. Econometrica 56: 1247–1257.

    Article  Google Scholar 

  • Crémer, J., F. Khalil, and J. Rochet. 1998. Strategic information gathering before a contract is offered. Journal of Economic Theory 81: 163–200.

    Article  Google Scholar 

  • D’Aspremont, C., and L. Gérard-Varet. 1979. Incentives and incomplete information. Journal of Public Economics 11: 25–45.

    Article  Google Scholar 

  • Dasgupta, P., P. Hammond, and E. Maskin. 1979. The implementation of social choice rules. Review of Economic Studies 46: 185–216.

    Article  Google Scholar 

  • Dewatripont, M. 1989. Renegotiation and revelation information over time: The case of optimal labour contracts. Quarterly Journal of Economics 104: 489–520.

    Article  Google Scholar 

  • Edlin, A., and S. Reichelstein. 1996. Hold-ups, standard breach remedies, and optimal investments. American Economic Review 86: 478–501.

    Google Scholar 

  • Fama, E. 1980. Agency problem and the theory of the firm. Journal of Political Economy 88: 288–307.

    Article  Google Scholar 

  • Faure-Grimaud, A., J.-J. Laffont, and D. Martimort. 2003. Collusion, delegation and supervision with soft information. Review of Economic Studies 70: 253–280.

    Article  Google Scholar 

  • Gale, D., and M. Hellwig. 1985. Incentive-compatible debt contracts: The one-period problem. Review of Economic Studies 52: 647–663.

    Article  Google Scholar 

  • Gibbard, A. 1973. Manipulations of voting schemes: A generalized result. Econometrica 41: 587–601.

    Article  Google Scholar 

  • Green, J., and C. Kahn. 1983. Wage-employment contracts. Quarterly Journal of Economics 98: 173–188.

    Article  Google Scholar 

  • Green, J., and J.-J. Laffont. 1977. Characterization of satisfactory mechanisms for the revelation of preferences for public goods. Econometrica 45: 427–438.

    Article  Google Scholar 

  • Green, J., and N. Stokey. 1983. A comparison of tournaments and contracts. Journal of Political Economy 91: 349–364.

    Article  Google Scholar 

  • Grossman, S., and O. Hart. 1983. An analysis of the principal-agent problem. Econometrica 51: 7–45.

    Article  Google Scholar 

  • Grossman, S., and O. Hart. 1986. The costs and benefits of ownership: A theory of lateral and vertical integration. Journal of Political Economy 94: 691–719.

    Article  Google Scholar 

  • Groves, T. 1973. Incentives in teams. Econometrica 41: 617–631.

    Article  Google Scholar 

  • Guesnerie, R., and J.-J. Laffont. 1984. A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm. Journal of Public Economics 25: 329–369.

    Article  Google Scholar 

  • Harris, M., and B. Holmström. 1982. A theory of wage dynamics. Review of Economic Studies 49: 315–333.

    Article  Google Scholar 

  • Hart, O. 1983. Optimal labour contracts under asymmetric information: An introduction. Review of Economic Studies 50: 3–35.

    Article  Google Scholar 

  • Hart, O., and J. Moore. 1988. Property rights and the nature of the firm. Journal of Political Economy 98: 1119–1158.

    Article  Google Scholar 

  • Hart, O., and J. Tirole. 1988. Contract renegotiation and Coasian dynamics. Review of Economic Studies 55: 509–540.

    Article  Google Scholar 

  • Holmström, B. 1979. Moral hazard and observability. Bell Journal of Economics 10: 74–91.

    Article  Google Scholar 

  • Holmström, B. 1982. Moral hazard in teams. Bell Journal of Economics 13: 324–340.

    Article  Google Scholar 

  • Holmström, B. 1999. Managerial incentive problems: A dynamic perspective. Review of Economic Studies 66: 169–182.

    Article  Google Scholar 

  • Holmström, B., and P. Milgrom. 1987. Aggregation and linearity in the provision of intertemporal incentives. Econometrica 55: 303–328.

    Article  Google Scholar 

  • Holmström, B., and P. Milgrom. 1991. Multi-task principal agent analysis. Journal of Law, Economics, and Organization 7: 24–52.

    Article  Google Scholar 

  • Holmström, B., and P. Milgrom. 1994. The firm as an incentive system. American Economic Review 84: 972–991.

    Google Scholar 

  • Holmström, B., and R. Myerson. 1983. Efficient and durable decision rules with incomplete information. Econometrica 51: 1799–1819.

    Article  Google Scholar 

  • Holmström, B., and J. Tirole. 1997. Financial intermediation, loanable funds, and the real sector. Quarterly Journal of Economics 112: 663–691.

    Article  Google Scholar 

  • Itoh, H. 1993. Coalition incentives and risk-sharing. Journal of Economic Theory 60: 416–427.

    Article  Google Scholar 

  • Jewitt, I. 1988. Justifying the first-order approach to principal-agent problems. Econometrica 56: 1177–1190.

    Article  Google Scholar 

  • Jullien, B. 2000. Participation constraints in adverse-selection models. Journal of Economic Theory 93: 1–47.

    Article  Google Scholar 

  • Laffont, J.-J., and D. Martimort. 1998. Collusion and delegation. Rand Journal of Economics 29: 280–305.

    Article  Google Scholar 

  • Laffont, J.-J., and D. Martimort. 2000. Mechanism design with collusion and correlation. Econometrica 68: 309–342.

    Article  Google Scholar 

  • Laffont, J.-J., and D. Martimort. 2002. The theory of incentives: The principal-agent model. Princeton: Princeton University Press.

    Google Scholar 

  • Laffont, J.-J., and E. Maskin. 1979. A differentiable approach to expected utility maximizing mechanisms. In Aggregation and revelation of preferences, ed. J.-J. Laffont. Amsterdam: North-Holland.

    Google Scholar 

  • Laffont, J.-J., and J. Tirole. 1986. Using cost observation to regulate firms. Journal of Political Economy 94: 614–641.

    Article  Google Scholar 

  • Laffont, J.-J., and J. Tirole. 1988. The dynamics of incentive contracts. Econometrica 56: 1153–1175.

    Article  Google Scholar 

  • Laffont, J.-J., and J. Tirole. 1990. Adverse selection and renegotiation in procurement. Review of Economic Studies 57: 597–626.

    Article  Google Scholar 

  • Laffont, J.-J., and J. Tirole. 1993. A theory of incentives in procurement and regulation. Cambridge, MA: MIT Press.

    Google Scholar 

  • Lewis, T., and D. Sappington. 1989. Countervailing incentives in agency problems. Journal of Economic Theory 49: 294–313.

    Article  Google Scholar 

  • Ma, C. 1988. Unique implementation of incentive contracts with many agents. Review of Economic Studies 55: 555–572.

    Article  Google Scholar 

  • Mailath, G., and A. Postlewaite. 1990. Asymmetric information bargaining problems with many agents. Review of Economic Studies 57: 351–638.

    Article  Google Scholar 

  • Maskin, E. 1999. Nash equilibrium and welfare optimality. Review of Economic Studies 66: 23–38.

    Article  Google Scholar 

  • Maskin, E., and J. Riley. 1984. Monopoly with incomplete information. Rand Journal of Economics 15: 171–196.

    Article  Google Scholar 

  • Maskin, E., and J. Tirole. 1990. The principal-agent relationship with an informed principal. I: Private values. Econometrica 58: 379–410.

    Article  Google Scholar 

  • Maskin, E., and J. Tirole. 1992. The principal-agent relationship with an informed principal. II: Common values. Econometrica 60: 1–42.

    Article  Google Scholar 

  • Mirrlees, J. 1971. An exploration in the theory of optimum income taxation. Review of Economic Studies 38: 175–208.

    Article  Google Scholar 

  • Mirrlees, J. 1999. The theory of moral hazard with unobservable behaviour. Part I. Review of Economic Studies 66: 3–22.

    Article  Google Scholar 

  • Mookherjee, D. 1984. Optimal incentive schemes with many agents. Review of Economic Studies 51: 433–446.

    Article  Google Scholar 

  • Moore, J. 1992. Implementation in environments with complete information. In Advances in economic theory, ed. J.-J. Laffont. Cambridge: Cambridge University Press.

    Google Scholar 

  • Moore, J., and R. Repullo. 1988. Subgame-perfect implementation. Econometrica 56: 1191–1120.

    Article  Google Scholar 

  • Mussa, M., and S. Rosen. 1978. Monopoly and product quality. Journal of Economic Theory 18: 301–317.

    Article  Google Scholar 

  • Myerson, R. 1979. Incentive compatibility and the bargaining problem. Econometrica 47: 61–73.

    Article  Google Scholar 

  • Myerson, R. 1981. Optimal auction design. Mathematics of Operations Research 6: 58–63.

    Article  Google Scholar 

  • Myerson, R., and M. Satterthwaite. 1983. Efficient mechanisms for bilateral trading. Journal of Economic Theory 28: 61–73.

    Google Scholar 

  • Nalebuff, B., and J. Stiglitz. 1983. Prizes and incentives: Towards a general theory of compensation. Bell Journal of Economics 14: 21–43.

    Article  Google Scholar 

  • Rogerson, W. 1985. The first-order approach to principal-agent problems. Econometrica 53: 1357–1368.

    Article  Google Scholar 

  • Shavell, S. 1979. On moral hazard and insurance. Quarterly Journal of Economics 93: 541–562.

    Article  Google Scholar 

  • Smith, A. 1776. The wealth of nations, 1991. New York: Prometheus Books.

    Google Scholar 

  • Spear, S., and S. Srivastava. 1987. On repeated moral hazard with discounting. Review of Economic Studies 54: 599–617.

    Article  Google Scholar 

  • Spence, M. 1973. Job market signaling. Quarterly Journal of Economics 87: 355–374.

    Article  Google Scholar 

  • Spence, M. 1974. Market signalling: Informational transfer in hiring and related processes. Cambridge, MA: Harvard University Press.

    Google Scholar 

  • Tirole, J. 1986. Hierarchies and bureaucracies: On the role of collusion in organizations. Journal of Law, Economics and Organization 2: 181–214.

    Google Scholar 

  • Tirole, J. 1999. Incomplete contracts: Where do we stand? Econometrica 67: 741–782.

    Article  Google Scholar 

  • Townsend, R. 1979. Optimal contracts and competitive markets with costly state verification. Journal of Economic Theory 21: 417–425.

    Article  Google Scholar 

Download references

Acknowledgment

I thank D. Gromb and J. Pouyet for helpful comments on an earlier version

Author information

Authors and Affiliations

  1. http://link.springer.com/referencework/10.1057/978-1-349-95121-5

    David Martimort

Authors
  1. David Martimort
    View author publications

    You can also search for this author in PubMed Google Scholar

Editor information

Copyright information

© 2018 Macmillan Publishers Ltd.

About this entry

Check for updates. Verify currency and authenticity via CrossMark

Cite this entry

Martimort, D. (2018). Contract Theory. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_2542

Download citation

Publish with us

Policies and ethics

Search

Navigation