• Table of Contents
    • Abstract
    • Keywords
    • Article
      • Adverse selection
        • Direct extensions
        • Multi-agent organizations
        • Dynamics
        • Applications
      • Moral hazard
        • Risk neutrality
        • Risk aversion
        • Extensions
        • Multi-agent organizations
        • Dynamics
      • Non-verifiability
        • Extensions
    • See Also
    • Bibliography
    • How to cite this article

contract theory

David Martimort
From The New Palgrave Dictionary of Economics, Second Edition, 2008
Edited by Steven N. Durlauf and Lawrence E. Blume
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Abstract

This article offers a brief overview of contract. It focuses on the theory of complete contracts and the three associated paradigms of adverse selection, moral hazard and non-verifiability. By showing difficulties in allocating resources between asymmetrically informed partners, contract theory has deeply changed our view of the functioning of organizations and markets.
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Keywords

adverse selection; asymmetrical information; Bayesian-Nash equilibrium; collusion; contract theory; cost observability; free-rider problem; incentive compatibility; incentive constraints; incomplete contracts; informativeness principle; insurance; Laffont, J.-J.; limited liability; monotonicity; moral hazard; multi-agent organizations; non-verifiability; optimal contract; Pontryagyn principle of optimality; principal and agent; revelation principle; risk aversion; risk neutrality; sharecropping; Spence–Mirrlees condition; tournaments
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Article

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See Also

I thank D. Gromb and J. Pouyet for helpful comments on an earlier version.
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How to cite this article

Martimort, David. "contract theory." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2008. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 18 May 2013 <http://www.dictionaryofeconomics.com/article?id=pde2008_C000340> doi:10.1057/9780230226203.0309

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