Description: This module incorporates basic "principal-agent" contract theory in the context of hidden information and hidden actions, the modern theory of the firm, and incentive theory in light of empirical evidence, incorporating recent behavioural models. Applications include the optimal compensation of CEO's, the "make or buy" decision, motivating team performance, and the impact of an altruistic manager.
Feedback for this module will occur through class meetings where we will go over the answers to problem sets and where you will be able to ask questions about your own method of solution; answers that will be posted on the website for the module that will give you written guidance on the appropriate method to approach the problems, assignments, and tests; and office hours where any additional questions can be addressed. You should be sure that you use these methods to understand how to improve your own performance.
Learning outcomes: Students should come away with a good intuitive and formal understanding of the basics of contract theory, incentive theory, and the theory of the firm. They should understand how to apply these to real world issues in policymaking, finance, and management, how these fit into the broader economic models and discussion, and to use this in conducting research. In this context, they should be able to set up a simple formal model, understand its key assumptions and components, derive its predictions, explaining the intuition behind these results. They should also have an understanding of how these models have been examined and tested empirically, and some awareness of and appreciation for cutting-edge research in this area, including behavioural critiques. In completing examinations, students will demonstrate their problem-solving analytical and deductive skills
Key and Employability Skills: The students should attain a deeper understanding of the principles behind compensation schemes, and the trade-offs at play in setting incentives. They will also gain a broad understanding of key issues related to the scope of the firm that will be relevant to private enterprise decisions, merger analysis, and government procurement. The student will gain logical thinking skills, and the ability to build a model distilling the essence of the problem, abstracting from complications, but being aware of the costs of such simplifications. They will learn to discuss economic theory in plain language, relating this to real world issues and empirical data. This module incorporates literacy and numeracy skills, as well as research, and communication skills.
- Module Supervisor: Aditya Kuvalekar