The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Contract Theory

  • David Martimort
Reference work entry


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.


Adverse selection Asymmetrical information Bayesian-Nash equilibrium Collusion Contract theory Cost observability Free-rider problem Incentive compatibility Incentive constraints Incomplete contracts Informativeness principle Insurance Laffont, J.-J. Limited liability Monotonicity Moral hazard Multi-agent organizations Non-verifiability Optimal contract Pontryagyn principle of optimality Principal and agent Revelation principle Risk aversion Risk neutrality Sharecropping Spence–Mirrlees condition Tournaments 

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


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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • David Martimort
    • 1
  1. 1.