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2014/2015  KAN-CMATV1053U  Economic of Information and Contracts

English Title
Economic of Information and Contracts

Course information

Language English
Course ECTS 7.5 ECTS
Type Mandatory
Level Full Degree Master
Duration One Semester
Course period Autumn
Timetable Course schedule will be posted at calendar.cbs.dk
Study board
Study Board for BSc/MSc in Business Administration and Management Science, MSc
Course coordinator
  • Anette Boom - Department of Economics (ECON)
Main academic disciplines
  • Economics, macro economics and managerial economics
Last updated on 08-04-2015
Learning objectives
After having attended the course the students should be able
Economic of Information and Contracts:
Exam ECTS 7,5
Examination form Written sit-in exam
Individual or group exam Individual
Assignment type Written assignment
Duration 4 hours
Grading scale 7-step scale
Examiner(s) Internal examiner and external examiner
Exam period Autumn Term
Aids allowed to bring to the exam Closed Book: no aids
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

The aim of the course is to give the students a comprehensive insight into Information Economics and Contract Theory and its applications.

The theories focus on situations with incomplete information. Two or more partners which want to trade or to start a joint venture do not have complete information of important characteristics of the other partner or about the other partner’s effort level. Often this implies asymmetric information.  That means one partner knows his own characteristics or effort level, but the other cannot observe these characteristics or the level of effort, but knows that he/she knows less than the other partner.  An example is the market for second-hand cars where the seller has a much better idea about the quality of the car due to his/her experience from driving it than a potential buyer. The same is true for the insurance market where insurance customers can often evaluate their life style or health situation or the level of their activities to reduce damages much better than the insurance company.  If an entrepreneur seeks finances from a bank or a venture capital fund, he/she knows most likely much more about the sustainability of the business idea than the bank or the fund managers. A CEO is also in a better position to evaluate his/her level or quality of effort than the board of directors or the shareholders of the firm.  A bus company that runs bus lines on behalf of a municipality is also better informed about its cost of running the lines than the municipality. This gives the company an advantage in the bargain with the municipality about the compensation it receives for providing its services. There are lots of examples of economic situations where asymmetric information is important and this course should help you in understanding which problems occur, for example, on second-hand car markets, insurance markets or in financing new businesses and by which contractual measures they can be reduced. Usually it is the less-informed partner who wants to secure him-/herself against being exploited by the more informed partner and how this can be done is also discussed in the course.

The course is split in two parts. The first two thirds of the lectures are centred around the main textbook on the economics of information and contract theory. Here you get an insight into models of asymmetric information (hidden information) and moral hazard (hidden action) as well as into signalling models and principle agent models. In the second part of the course (approximately one third of the lectures ) we will focus on specific applications of the theory chosen also with regard to the interests of the students in class. Application could be taken from corporate governance, the financing of new businesses, recruitment or the salaries of new employees, public or private procurement, the regulation of markets with imperfect competition, corporate finance, privatisation of public firms, income taxation, etc.

Teaching methods
The teaching consists of lectures and exercises and hopefully also of presentation of applications by students.
Expected literature

Inés Macho-Stadler and David Pérez-Castrillo: An Introduction to the Economics of Information – Incentives and Contracts, 2nd Edition, Oxford University Press, 2001

This main textbook is supplemented by articles and cases that illustrate the application of the theory. (In the two courses in 2013 we covered for example empirical studies with regard to franchising and with regard to asymmetric information problems on insurance markets.)


Supporting Literature:

- A. Mas-Colell, M. D. Whinston and J. R. Green: Microeconomic Theory, Oxford University Press, 1995 (chs. 13-14) (mikroøkonomibog på mellemniveau)

- B. Salanié: The Economics of Contracts – A Primer, MIT Press, 1997

- P. Bolton and M. Dewatripont: Contract Theory, MIT Press, 2005

Last updated on 08-04-2015