Contract Theory and Mechanism Design

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For the first 5-6 weeks I will lecture on the following topics: moral hazard, moral hard in teams, dynamic agency, renegotiation in agency, adverse selection, renegotiation and adverse selection, and implementation.For the final few weeks, students split into teams will present papers from the list below.


The final grade will be determined by (1) Problem Sets (2) quality of presentation and (3) referee reports (equal weight):

(1)   I will give out several problem sets (3-4).

(2)   Teams can decide who should present what paper.You should present using overheads and distribute copies to the class.

(3)   Except in the week you are presenting, a referee report on the papers to be presented that week is due at the start of class.The referee report should include a summary of the paper, its relation to the literature, its originality and a critical discussion of it contribution.


I will lecture out of some combination of Salanie�s The Economics of Contracts (MIT Press) and Lars Stole�s Lectures on Contracts and Organization (, order these things if you want to though you do not need to if you pay attention in class.Most of the papers for the topics part of the course have links to the paper.You will need to download these.

List of Topics

Foundations of Incomplete Contracts

Che, Y. and D. Hausch (1999), �Cooperative Investments and the Value of Contracting,� American Economic Review, 125-147.

Andreas Roider, �Delegation of Authority as an Optimal (In)Complete Contract,� mimeo, Bonn.

Andreas Roider, �Asset Ownership and Contractibility of Interaction,� forthcoming, RAND Journal of Economics.

Oliver Hart and John Moore, �A Dynamic Model of Debt,� Quarterly Journal of Economics, Issue 1, 1998.


Relational Contracts

Che, Y-K. and S. Woo (2001), �Optimal Incentives for Teams,� June, 525-541

Levin, J. (2003), "Relational Incentive Contracts," forthcoming, American Economic Review. (Also an appendix.)

MacLeod , B. and J. Malcolmson (1989), �Implicit Contracts, Incentive Compatibility and Involuntary Unemployment, Econometrica, 447-480

Baker, G., R. Gibbons, and K. J. Murphy (1994), "Subjective Performance Measures in Optimal Incentive Contracts," Quarterly Journal of Economics, 109(4), 1125-56.

Baker, G., R. Gibbons, and K. J. Murphy (2002), "Relational Contracts and the Theory of the Firm," Quarterly Journal of Economics, 117(1), 39-84.

Baker, G., R. Gibbons, and K. J. Murphy (2002), "Bringing the Market Inside the Firm," forthcoming, American Economic Review.

Baker, G. and T. Hubbard (2003), �Make vs. Buy in Trucking: Asset Ownership, Job Design and Information,� American Economic Review, June, 551-572.

Mechanism Design

Bernheim, Douglas and Michael Whinston (1998), �Incomplete Contracts and Strategic Ambiguity,�
American Economic Review, 902-32.

Bull, J. and J. Watson (2002), "Evidence Disclosure and Verifiability," UCSD, mimeo.

Brennan, J. and J. Watson (2003), �The Renegotiation-Proofness Principle and Costly Renegotiation,� UCSD, mimeo.

Watson, J. (2003), �Contract, Mechanism Design and Technological Detail,� mimeo, UCSD

Political Applications

Aghion, P. and P. Bolton (2002), "Incomplete Social Contracts," Princeton, mimeo.

L. Anderlini, L. Felli and A. Postlewaite, (2003): "Courts of Law and Unforeseen Contingencies," LSE, mimeo.

Dewatripont, M. and J. Tirole (1999), "Advocates," Journal of Political Economy , 107(1): 1-39.


Aghion, P., M. Dewatripont, and P. Rey (2002a), "On Partial Contracting," European Economic Review, 46, 745-753;
___________ (2002b), "Transferable control," forthcoming, Journal of the European Economic Association.

Dessein, W. (2002): �Authority and Communication in Organizations,� Review of Economic Studies.

Multi-Agent Contracts

Rayo, Luis (2002), "Relational Team Incentives and Ownership," Chicago, mimeo.

Tirole, J. (1996), "A Theory of Collective Reputations (with Applications to the Persistence of Corruption and to Firm Quality)," Review of Economic Studies, 63(1), 1-22.