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2011/2012  KAN-OE11  Contract, Agency and Game Theory

English Title
Contract, Agency and Game Theory

Course Information

Language English
Point 7,5 ECTS (225 SAT)
Type Mandatory
Level Full Degree Master
Duration One Semester
Course Period Autumn
Time Table Please see course schedule at e-Campus
Max. participants 25
Study Board
Study Board for MSc in Advanced Economics and Finance
Course Coordinator
  • Peter Bogetoft - Department of Economics
Main Category of the Course
  • Economics, macro economics and managerial economics
Last updated on 29 maj 2012
Learning Objectives
Students are required to:
  • understand static and dynamic games, incomplete information games and the Revelation Principle
  • understand the basic problems of coordination and motivation under asymmetric information and the trade-offs involved
  • be familiar with the different classes (types) of contract and mechanism design problems, including hidden action, hidden information, dynamic, multiple agents, and incomplete information problems
  • be able to formalise and solve (simple) contract design problems of the different types
  • be able to link important themes in the business and microeconomic literature with contract theory
  • be able to apply their understanding of contract theory to real contracts (cases) and to balance the multiple objectives and issues involved in such cases.
Contract, Agency and Game Theory
The exam in the subject consists of two parts:
Midterm exam:
Weight 25%
Assessment Home Assignment
Marking Scale 7-step scale
Censorship No censorship
Exam Period October
Aids Please, see the detailed regulations below
Duration Please, see the detailed regulations below
The midterm is a written 3 pages paper covering a case analysis done in a two-week period. The paper shall provide an executive summary of the contract, its pros and cons, and some key proposals for how to improve the contract. The case analysis and case presentation will take place in groups of no more that 4 students, but the written summaries are individual.

The retake will be organized as an 8 pages individual paper.
Final exam:
Weight 75%
Assessment Written Exam
Marking Scale 7-step scale
Censorship No censorship
Exam Period December/January
Aids Closed Book
Duration 4 Hours
Course Content

Contract and agency theory gives a fundamental understanding of motivation and coordination issues under asymmetric information. The theory hereby also provides an analytical basis of micro- and business economics.

The course consists of three parts. In the first part, we cover game theoretical results and in particular, we discuss static games, dynamic games including repeated games, and Bayesian games. In the second part, the basic ideas of contract theory are presented. We will in particular analyse contracts, where one party has hidden information (adverse selection) and/or can take a hidden action (moral hazard). We will also discuss some more advanced models with multiple agents, multiple periods etc. In addition, we will cover key aspects of more general mechanism design and discuss incomplete contracts. The aim of this part is to get a good understanding of the basic trade-offs involved, e.g. motivation versus risk sharing, and the basic mechanisms (such as information collection, menu of contracts, signalling etc). The aim is also to train the students to actually make optimal contracts and related mechanisms in simple settings by formulation and solving the associated mathematical programmes. In the third part, we use the developed theories to analyse important economic issues in both organisational and market contexts. The choice of topics shall be coordinated with the other courses in the programme, but could naturally include subjects such as allocation of decision rights, relative performance evaluation, yardstick competitions and regulation, career concern, CEO payment schemes, capital acquisition, capital budgeting, transfer pricing etc. In this part we also develop a holistic approach to contract design. The aim is to give a systematic approach that can be used to design new contracts or improve existing ones. The students will be asked to analyse key characteristic of a specific contract, e.g. a contract used in an actual supply chain. The course builds on decision theory, game theory and microeconomics. A good understanding of mathematics and statistics is an advantage.

Teaching Methods
Lectures, exercises and case analyses.
Student Workload
SAT 225 hours
Further Information
Part of this course may also be taken as a Phd course for a limited number of Phd students.