You are on page 1of 150
AN INTRODUCTION TO THE ECONOMICS OF INFORMATION INCENTIVES AND CONTRACTS Second Edition Inés Macho Stadler David Pérex-Catil ‘andatedy Rear Wat OXFORD PREFACE ‘The eamomi of informations posbly th area of economic theory that has coved most over the past ifteen years. Developed in paral withthe new ‘conomie of Industria Organieation, its importance and applications have row spectacularly, objective isto study the situations in which agents tempt to overcome thei ignorance about some relevant information by taking decision designed to aequire new information a to avoid some of the cost of thei ignorance When the infomation i asymmetrically ds tributed among agents, these decisions involve the designing of contracts intended to provide incentives andlor to indice the revelation of private "This book consider stutonsin which asymmetric information exsin contractual relationship, that sto a. in which one participant knows some ‘hing that another doesn. We aaieehremportant themes: moral azar, ‘adverse ston and sallng The models in which these themes ae studi “llow sto explain aarge number of economic situations, eventhough we do not analyse all the economic themes elated to information. Our choice is ‘based onthe ides of looking at only few themes bat in enough depth for our readers to acquire acerain independence “The book s organized inthe following way- There are ive chapters, the ast threebeing deste tothe above-mentioned hemes In Chapter2 we present ‘he symmetric information station, the reference model, which serves 38.8 necessary starting-point to understand the effec ofeach of the informational problems that ll. This chapter presents a base model in which the difer- ‘ent problems ar analysed. The homogencous nature ofthis model has the advantage of allowing the ret tbe compared in simple and natural way. ‘The book begins with an introduction, in which the themes tbe studied ae presented together with several examples tht show how te economics of in ormation can be of interest Hess the examples contained in the principal text ach chapter has de tailed application of the models nd ther reals, In these supplement, we resent simple models with lear economic messages rating to interesting, nd current themes (finance insurance, ecology transfer, frm regulation, publisubsiies et) Often. an application sa simplified version ofan article published in ascentifc journal andcan be read quite independent fom the Preface Imai text ofthe chapter This could be wsefal to those who peferto begin each theme with rigorous presented example. Each chapter also contains exercises of varying difcly,n oder that he stadt can beep tak of his eel of leaing a well a srving a comple rent tothe text Exercises of particular difficulty are marked with an asters Tisneer easy to know if the best strategy fom an insractor point of view is toincladetherlutions tothe exercises inthe same tx or not Since te exe ‘drs aeofen non-conventional, we have decided oincude the solutions a ‘the end of the book Finalh,the more formal aspects ofeach hapler ae rele- sated to complementary materal sections "The book designed tobe a one-semester undergraduate course ortobea support tex fora doctorate cours on the subject. For thisreason, we were ws sbletorevtthe temptation tonclude inthe thee central chaptrssetons on ‘vanced themes. These section do not present new model butraherarede signed tobe a reading guide that we hope willbe uel the interested reader aiid that canbe ignored for introductory course. ‘With especttothe eqired background knowledge tobe abeto follow this introductory course on the Economics of Information, students who have done baie courer of maths and micro-conomics should ind no dificlis in falling this book. The text is xref in it treatment ofthe salations wo constrained maximization problems, bu to resolve any doubts onthe theory of maximization we include ashort appendix onthe Kuhn-Tucke method. ACKNOWLEDGMENTS, “This text was born from the lecture notes used during several academic ‘courses at the University of the Basque Country (Eusal Herrko Uniberstate), and atthe Autonomous University of Barelona (Universitat, ‘Autonoma de Barcelona). The commento he students who worked on pre liminary versions of thisbook hve contbuted0itsenrichment. There ‘tin the themes analysed as been the ving force behing the project. The notesbeeame introduc aa Economia del Ijormacin, published by vil Economia in 194, An Inrduction othe Economies of Information basically ‘the English trandaton ofthe Spanish version, wih some min revisions. We regatta to Ariel Economia andi editor Marcelo Covi for their ep and ‘Support and to Oxford University Press and its editor Andrew Shullerforad- ‘ir and encouragement ‘Many colleagues have collaborated inthe provement ofthe nal version. ‘Weewould keto thank Paul de Bl Femando Branco, Antonio Cabrales, ose vi Preface Maras Rocha, Marla Angele de Fos, a lvl Mate Pst Kiss MERI oa Sobel ey red ener veins of the cuper and ge TINS Sitiguerandsugrsions. We want fo cend our acknowl seta eo whonrwe te xadenical indebted profes to aarese ehom we have colored on ferent projets. Amongthe Grae Stier artes nd Roger Guns deserve spec mention “Mwai it acknowledge our debt colleague Rchard Wat who var cnemous lp during te rpuratin ofthe Engl material fo i Tone at wethan he DGICYT no. P9205, and Human Capital and any projects ERBCHIXCT no, 20055 nd 930297 fr franca aid Inde Macho Sar eid Pérecaslo aera Baral Novomter 1985 CONTENTS Pre 1. Introduction 1, introduction 1.2, TheElements ofthe Problem 13. Thelnertemporal Development ofthe Relationship and the Reference Bramework 14. Types of Asymmetric Information Problems ALL Moral haa TELE Adverse ston 143, Signaling 2, The Base Model 2.1, Introduction 2.2, Description ofthe Model 2.3, Symmetric Information Contacts 22.1. Theopima payment means 232 Theopimalleedof ort, 3, The Moral Hazard Problem 2. Introduction 5.2, The Moral Hazard Problem 33. The Agent Chooses betwen Two fort Levels 5.4 Soton Using the First Order Approsch ” a 3 2 Contents 2.5, ASimple Cas with Continous Ent ° 3.6. Moral Hstard with Hidden Information st 3.7, Some Comments on the Simple Moral Hazard Models st 7. These of formsion = 373. Theses tects contacts se 174. What happens when itis the agent who ols the 3A. Complementary Material Pa 2A. A geomet ation ofthe morta problem 2 SA2, Thepotiem that maybe found when applying the fs order approsch e 3A9, Thermo agent case a 3B, Applications 6 SIL, Incentive for managers “6 532. Fotingcontracts between ounce e 138. Mora bard and eatning in heat arhet a SA. Invoduciono know bow intechnologywanserconacs 75 Emacs ” SC, Advanced Themes w 4. The Adverse Selection Problem a SCL. Optimal pment mechanismsin stations of moral azar thee aga e 302. Onpiationd deign ia liionshipewithecveslagents 92 SC, Moral based wih ever ta 4 SCH Repeated mora hard SC, Reon between several principals andone agent > 441 traduction 103 42. AMode of Adverse Selection 106 443, When Principals Compete for Agents Ww 43.1 Thebenchmark: Smmetrcinfomaton ue 432. Prins cannot iting petty na 444, Adverse Selection with a Cotinoum of Posie Types Po 45. Comment 4 4A. Complementary Material 136 {12 Mean pt norman (rant cotact cep) 48, Applications {BL Compton ive ir compsi ‘82, Anamipssa opin eelngcotocs ‘3, Regain n ast ifomaton ones {SRA Deekion of monopaty proc qulty ries AC. Advanced Themes C1 Ratoni wither gens Actos 4C2 Orinion sgn SC. Repeated arene ton {4C. Malt mor haar and aden {$C Sora prince Signalling 5. tntedsction 5.2. The Value of Private Information and of Signalling 5.3. Education asa Signal 5 The Agents Signal thei Characteristic Ss, Separating egiibvium 542, Foling guru 5.5. The Informational Power of Cont 5.1. Symmeticinfrmation 552. Theagentraninormed st diay of the job S53, Seprsngequibra 536, Comments 453A. Complementary Material SAL Theinutectieriam 5B, Applications SB, Presthat signal qsity 52, Opinallicening contacts when the seer has pete ‘nfrmation ‘83, Debt level asgnal fea farm 209 210 a2 2” 29 x

You might also like