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2013/2014  KAN-OE11  Contract, Agency and Game Theory

English Title
Contract, Agency and Game Theory

Course information

Language English
Exam ECTS 7.5 ECTS
Type Mandatory
Level Full Degree Master
Duration One Semester
Course period Autumn
Time Table Please see course schedule at e-Campus
Max. participants 50
Study board
Study Board for MSc in Advanced Economics and Finance
Course coordinator
  • Peter Bogetoft - Department of Economics (ECON)
Main academic disciplines
  • Economics, macro economics and managerial economics
Last updated on 02-08-2013
Learning objectives
After participation in the course the student should be able to:
  • set up and analyze static and dynamic games and incomplete information games, as well as apply the Revelation Principle
  • use the concepts of hidden action, hidden information and signaling to design contracts under asymmetric information
  • solve the associated contracting problems mathematically
  • link selected themes in business economics and microeconomics to game theory and contract theory
  • analyze real contracts and balance multiple objectives involved in such cases
Course prerequisites
This is a mandatory course for the MSc in Advanced Economics and Finance. It is assumed that students have knowledge similar to the entry requirements for this programme. The course has 60 confrontation hours and there is a high level of interaction betw. lecturer and students, and in general a high work load.

To sign up send a 1-page motivational letter, a 1-page CV, and a grade transcript to oecon.eco@cbs.dk no later than14 May 2013. Please also remember to sign up through the online registration.
The exam in the subject consists of two parts:
Midterm exam:
Examination formHome assignment - written product
Individual or group examIndividual
Size of written productMax. 3 pages
Assignment typeCase based assignment
Duration2 weeks to prepare
Grading scale7-step scale
Examiner(s)One internal examiner
Exam periodAutumn Term
Make-up exam/re-exam
Another examination form
The retake will be organized as an 8- page individual paper.
Final exam:
Examination formWritten sit-in exam
Individual or group examIndividual
Assignment typeWritten assignment
Duration4 hours
Grading scale7-step scale
Examiner(s)One internal examiner
Exam periodDecember/January
Aids allowed to bring to the examLimited aids, see the list below and the exam plan/guidelines for further information:
  • Allowed calculators
  • Allowed dictionaries
Make-up exam/re-exam
Same examination form as the ordinary exam
If the number of registered candidates for the make-up examination/re-take examination warrants that it may most appropriately be held as an oral examination, the programme office will inform the students that the make-up examination/re-take examination will be held as an oral examination instead.
Course content and structure

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.
Further Information
Part of this course may also be taken as a PhD course for a limited number of PhD students.
Expected literature
An Introduction to the Economics of Information, Ines Macho-Stadler & K- David Perez-Castrillo, OUP (2nd edition)

A Primer in Game Theory; Robert Gibbons, Pearson
Last updated on 02-08-2013