Department of Economics
ECON 898.3 (04)
Contract Theory
T2: 2021/22
Course Details
Time:Tuesday and Thursday, 10:00-11:20
Location:THORV 205A
Website:Some materials will be available on Canvas.
Description and Expected Learning Outcomes
Contract theory is the field of economics concerns itself with finding and understanding mechanisms that allow for mutually beneficial trade in situations of information asymmetry. Contract theory addresses a large number of practically important questions, such as: What types of contracts do insurers offer to their clients? Who can get insurance? What salary patterns and career paths should firms offer their employees? What auction mechanism yields the highest return? Who should own a firm?

This course introduces the central concepts and methods used in contract theory. It presents a number of classic results, and equips students with the analytical tools to find efficient solutions for problems under asymmetric information.
Andreas PollakPhone: 966-5221
Arts 812E-mail: (preface subject with “ECON898”)
Office Hours:Tuesday and Thursday, 14:30-15:15, or by appointment
Required Textbook:
Patrick Bolton and Mathias Dewatripont: Contract Theory, MIT Press, Cambridge (MA) and London, 2005. [referred to as BD]

Other relevant books:
Chiappori, P.-A. and B. Salanié (2003), “Testing Contract Theory: a Survey of Some Recent Work” in Advances in Economics and Econometrics, vol 1, M. Dewatripont, L. Hansen and S. Turnovsky (eds.), Cambridge University Press.
Fudenberg, and J. Tirole, (1992), Game Theory, MIT Press.
Hart, O. (1995), Firms, Contracts and Financial Structures, Clarendon Press (chap. 1-4).
Laffont, J.J. and D. Martimort (2002), The Theory of Incentives: The Principal-Agent Model, Princeton University Press.
Salanié, B. (1997), Contract Theory: A Primer, MIT Press
Tentative Course Outline and Readings
1.Introduction (week 1)
BD, Chapter 1
2.Moral Hazard (weeks 2-4)
BD, Chapters 4 and 6
Holmstrom, B. (1979). "Moral Hazard and Observability." Bell Journal of Economics: 10:74-91.
Holmstrom, B. and P. Milgrom (1990), “Multi-Task Principal-Agent Analyses,” Journal of Law, Economics and Organization, 7, Special Issue.
Mirrlees, J. (1999), “The Theory of Moral Hazard and Unobservable Behavior”, Review of Economic Studies 66: 3-21.
3.Adverse Selection: Signalling and Screening (weeks 5-7)
BD, Chapters 2 and 3
Adams, W. and J. Yellen (1976), “Commodity bundling and the burden of monopoly,” Quarterly Journal of Economics 90: 475-498.
Baron, D. and R. Myerson (1982), “Regulating a Monopolist with Unknown Costs,” Econometrica, 50(4): 911-30.
Laffont, J-J and J. Tirole (1986), “Using Cost Observation to Regulate Firms,” Journal of Political Economy, 94(3).
Maskin, E. and J. Riley (1984), “Monopoly with Incomplete Information,” Rand Journal of Economics, 15: 171-96.
Mirrlees, J. (1971), “An exploration in the theory of optimum income taxation,” Review of Economic Studies 38: 175-208.
4.Multilateral Contracting: Auctions and Mechanism Design (weeks 8-10)
BD, Chapter 7
Cremer, J. and R. McLean (1988), “Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica 56, 1247-1258.
d'Aspremont, C. and L. Gerard-Varet (1979), “Incentives and Incomplete Information,” Journal of Public Economics, 11: 24-45.
Maskin, E. and J. Riley (1984), “Optimal Auctions with Risk-Averse Buyers,” Econometrica 52(6): 1473-1518.
Milgrom, P. and R. Weber (1982), “A Theory of Auctions and Competitive Bidding,” Econometrica 50(5):1089-1122.
Myerson, R. (1981), “Optimal Auction Design,” Mathematics of Operations Research, 6: 58-73.
Myerson, R. and M. Satterthwaite (1983), “Efficient Mechanisms for Bilateral Trading,” Journal of Economic Theory, 29: 265-281.
5.Dynamic Adverse Selection: Renegotiation (weeks 11-13)
BD, Chapter 9
Dewatripont, M. (1989), “Renegotiation and Information Revelation over Time: The Case of Optimal Labor Contracts,” Quarterly Journal of Economics, 104: 589-619.
Diamond, D. (1989), “Reputation Acquisition in Debt Markets,” Journal of Political Economy, 97(4), 828-62.
Hart, O. and J. Tirole (1988), “Contract Renegotiation and Coasian Dynamics,” Review of Economic Studies, 55: 509-540.
Laffont, J.-J. and J. Tirole (1988), “The Dynamics of Incentive Contracts,” Econometrica, 56(5): 1153-1175.
Townsend, R. (1982), “Optimal Multiperiod Contracts and the Gain from Enduring Relationships under Private Information,” Journal of Political Economy, 90, 1166-86.

Required readings for each topic are printed in bold font.
Please note that this is a tentative list of topics, and that both the course outline and the list of readings may be updated during the term.
There will be three components to your grade:
Midterm ExamMarch 320%
Final ExamTBA65%
The weight of the midterm will be shifted to the final if this results in a better overall grade.

Assignments:There will be several assignments, covering all major topics of the course. If you receive help from any source (book, another person, website) you must cite it on your assignment. Failure to cite could be construed as academic dishonesty. You will have at least one week to complete each assignment. While you are encouraged to cooperate solving the assignments, I expect the answers that are handed in to reflect students’ individual contributions. Late assignments will not be accepted. The assignment with the lowest mark will not be used in the calculation of your overall grade. Some answer keys may be posted on Canvas, and the assignments will be discussed in class.
Exams:There will be an 80-minute midterm exam and a 180-minute final. Exams will be cumulative and test your understanding of the subject material and your ability to analyse and formulate solutions to specific problems. The assignments are intended to assist you in the preparation for the exams, but note that exam questions are typically different from assignment questions. The exams are closed book. No electronic devices will be permitted during the exams, with the exception of simple calculators.
Missed Components:If assignments or the midterm exam cannot be completed for a justifiable reason, it may be possible to make alternative arrangements prior to the due date at the instructor’s discretion. If no such arrangements are made and the component is missed, a grade of 0 will be assigned, unless the student provides written documentation of circumstances beyond his or her control that prevented him or her from completing the assignment on time. (This documentation typically takes the form of a doctor’s note.)
Attendance:University policies apply. Regular attendance is recommended.
Grading System:See for a description of the percentage grading system used in this course.
Other Information
Recording of the Course
Students will be allowed to record lectures if they provide a reasonable rationale and if there are no objections by other students.

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Students who have disabilities (learning, medical, physical, or mental health) are strongly encouraged to register with Access and Equity Services (AES) if they have not already done so. Students who suspect they may have disabilities should contact AES for advice and referrals at any time. Those students who are registered with AES with mental health disabilities and who anticipate that they may have responses to certain course materials or topics, should discuss course content with their instructors prior to course add / drop dates. In order to access AES programs and supports, students must follow AES policy and procedures. For more information or advice, visit, or contact AES at 306-966-7273 or

Students registered with AES may request alternative arrangements for mid-term and final examinations. Students must arrange such accommodations through AES by the stated deadlines. Instructors shall provide the examinations for students who are being accommodated by the deadlines established by AES.

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