An Introduction to the Economics of Information Incentives and Contracts

A textbook on optimal contract theory, An Introduction to the Economics of Information covers the consequences for the character and efficiency of the interaction between individuals or organizations when one party has more or better information on some aspect of the relationship. This is thecondition of asymmetric information, under which the information gap will be exploited if, by doing so, the better-informed party can achieve some advantage. The book is written for a one semester course for advanced undergraduates taking specialized course options, and for first year postgraduatestudents of economics or business. After an introduction to the subject and the presentation of a benchmark model in which both parties share the same information throughout the relationship, chapters are devoted to the three main asymmetric information topics: Moral Hazard--when the asymmetryarises after the contract has been signed Adverse Selection--when the agent has relevant private infromation before the contract is signed Signalling--when the informed part is able to reveal private information through behaviour before the agreement is formalized The wide range of economicsituations where the conclusions are applied includes such areas as finance, regulation, insurance, labor economics, health economics, and even politics. Each chapter presents the basic theory before moving on to applications and advanced topics. The problems are presented in the same frameworkthroughout to allow easy comparison of the different results. Solved exercises test the student's understanding of the material, and develop the tools and skills provided by the main text to solve other, original problems.