Section A
(i)
(ii)
(iii)
1. Suppose that there are two players, a Principal (henceforth, P) and an agent
(henceforth, A). First, P designs the contract based on the available information. In the
second period A decides whether to accept the contract. If A
Slides - Transaction costs economics
2
1 Incomplete Contracts
Three factors that prevent complete contracting:
1. Limited or bounded rationality:
Bounded rationality refers to limits on the capacity of individuals to process information, deal with
comple
Slides - Toolbox for EB1
2
1 Ultimatum Game
Strategic form of the ultimatum game:
Players: Two people.
Terminal histories: The set of sequences (x; Z), where x is a number with
0
x
c (amount of money that player 1 offers to player 2),
and Z is either Y ("
EB1
Slides - Hidden Characteristics Problems
M. Lombardi
Monday, 21 October 2013
Slides - Hidden Characteristics Problems
2
1 An hidden characteristics problem
Two players: Agent (A, driver to be insured) and Principal (P, car insurance company)
Agent is
Slides - Hidden Characteristics Problems
7
2 Another example of hidden characteristics problem
There are drivers to be insured and a car insurance company
Drivers are risk-averse and their preferences are represented by u =
Drivers can be of two types :
=
Seminar 2
1. Suppose that there are two players:
principal (P) and agent (A). P designs
the contract based on the available
information. In the second period A
decides whether to accept the contract.
If A doesnt accept, the game ends and
each player recei
Slides - Transaction costs economics
2
1 The design of organisations is a mess but not a mistery
It is a mess because the organisational outcome is tipically not rst-best.
It is not misterious because:
Each agent takes actions that are optimal for her, g
Seminar 4
1. Assume that there are two firms: upstream (U: potential supplier of product) and
downstream (D: potential user of product), and two potential governance
structures: market exchange <M> (equal division of residual rights), forward
integration
Seminar 3
1. Suppose that the population of families employing a dentist can be divided into five
groups with equal probability of occurrence:
Annual Dental Outlays (in pounds)
200
400
600
800
1000
Each family knows the quality of the teeth of the various
1.
Exercise 2.2. Hendrikse:
An agent has to decide whether to accept a task
offered by a principal. If the agent doesnt
accept the task, then each player earns 20. If
the task is accepted, then the principal about
the division of the surplus generated by
Slides - Hidden Action Problems
4
2 An hidden action problem: The case of complete contract
Assumption 1 Only the agent knows e and the specic circumstances. The principal only observes
the nal outcome and he is not able to distinguish these two effects.
Slides - Hidden Action Problems
2
1 An hidden action problem: The case of complete contingent
contract (that is, agents action is observable by the principal)
Two players: Agent (A) and Principal (P)
Agent can choose between two level of efforts, e = 0 (l
Slides - Incentive Intensity Principle
8
2 The incentive-Intensity Principle
Objective: What we are looking for is an employment contract that balances the need of risk sharing
against the need to provide incentives.
How do we do it? We will be using line
Slides - Incentive Intensity Principle
2
1 Principle of risk sharing & value maximization
1.1 Basic toolbox:
A random variable x has a mean denoted by x, also called its expectation and denoted E [x]. The
formula for calculatin expectation is:
X
E [x] =
p
Is motivating the higher effort level
worthwhile if OG = 18 and OB = 10?
NO!
The table below represents the probabilities of the possible outcomes for
each level of e.
What it the optimal (payoff maximising) contract cfw_a*, b* that the
Principal can offe
Degrees of M.A. (Soc.Sci.), M.A., B.Acc., B.Sc., LLB with
Honours Economics
Degrees of M.A. (Soc.Sci.), M.A., B.Sc., LLB with Honours
Business Economics
Economics of Business 1: Contracts and Governance
In-course Examination
(10:00-11:00, Thursday 29 Nove
Intro
Unregulated Monopolist
Rate-of-Return Regulation
Results of RoR Regulation
Price-Cap
Train Chapter 1:
The Averch-Johnson Model of
Rate-of-Return Regulation
Hisayuki YOSHIMOTO
Univ. of Glasgow, Business School
Lecture on 2016, Jan. 18
Summary
Intro
U