• 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

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.

Part of this course may also be taken as a PhD course for a limited number of PhD students.

An Introduction to the Economics of Information, Ines Macho-Stadler & K- David Perez-Castrillo, OUP (2nd edition)

Design of Production Contracts: Lessons from Theory and Agriculture, Bogetoft, P. and H. B. Olesen, pp. 1-207, CBS-Press, 2004

A Primer in Game Theory; Robert Gibbons, Pearson