The Theory of Incentives: The Principal-Agent Model

by Jean-Jacques Laffont, David Martimort

Economics has much to do with incentives--not least, incentives to work hard, to produce quality products, to study, to invest, and to save. Although Adam Smith amply confirmed this more than two hundred years ago in his analysis of sharecropping contracts, only in recent decades has a theory begun to emerge to place the topic at the heart of economic thinking. In this book, Jean-Jacques Laffont and David Martimort present the most thorough yet accessible introduction to incentives theory to date. Central to this theory is a simple question as pivotal to modern-day management as it is to economics What makes people act in a particular way in an economic or business situation? In seeking an answer, the authors provide the methodological tools to design institutions that can ensure good incentives for economic agents.


This book focuses on the principal-agent model, the "simple" situation where a principal, or company, delegates a task to a single agent through a contract--the essence of management and contract theory. How does the owner or manager of a firm align the objectives of its various members to maximize profits? Following a brief historical overview showing how the problem of incentives has come to the fore in the past two centuries, the authors devote the bulk of their work to exploring principal-agent models and various extensions thereof in light of three types of information adverse selection, moral hazard, and non-verifiability. Offering an unprecedented look at a subject vital to industrial organization, labor economics, and behavioral economics, this book is set to become the definitive resource for students, researchers, and others who might find themselves pondering what contracts, and the incentives they embody, are really all about.

Genres: Economics, Textbooks, Reference

421 pages, Paperback

First published January 1, 2001

Reviews

[Sophia He · Rating 1 out of 5]

Did not enjoy.

[Kennedy Kahehara · Rating 5 out of 5]

( ˘ ³˘)♥
Laffont and Martimort's The Theory of Incentives gives a rigorous yet easy-to-understand introduction to mechanism design and contract theory. The basic problem dealt with is the principal-agent problem: a risk-neutral principal hires an agent who may be risk-averse and possesses private information. It introduces adverse selection, moral hazard, and screening models very nicely through well-structured theorems and their proofs.

A highlight is the derivation of the first-order incentive compatibility condition, foundational in contract theory:.

d/dx [u(x) − λc(x)] = 0

I only took a star off since sometimes the notation is unnecessarily convoluted for a reader; however, absolutely a must for anyone serious about information economics. (๑˃̵ᴗ˂̵)و

[Jimmy · Rating 5 out of 5]

Too technical. Too much math. Not necessarily bad, but not for me.

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After reread, this is a great book. Best book on incentive theory.