Overview

The theory of contracts grew out of the failure of the general equilibrium model to account for the strategic interactions among agents that arise from informational asymmetries. This popular text, revised and updated throughout for the second edition, serves as a concise and rigorous introduction to the theory of contracts for graduate students and professional economists. The book presents the main models of the theory of contracts, particularly the basic models of adverse selection, signaling, and moral hazard. It emphasizes the methods used to analyze the models, but also includes brief introductions to many of the applications in different fields of economics. The goal is to give readers the tools to understand the basic models and create their own. For the second edition, major changes have been made to chapter 3, on examples and extensions for the adverse selection model, which now includes more thorough discussions of multiprincipals, collusion, and multidimensional adverse selection, and to chapter 5, on moral hazard, with the limited liability model, career concerns, and common agency added to its topics. Two chapters have been completely rewritten: chapter 7, on the theory of incomplete contracts, and chapter 8, on the empirical literature in the theory of contracts. An appendix presents concepts of noncooperative game theory to supplement chapters 4 and 6. Exercises follow chapters 2 through 5.

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9780262195256

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Reviews

Salanie provides a broad overview of the economics of contracts. Concision and clarity make the book an elegant introduction to the subject for newcomers. But it is also a useful reference for experienced students and researchers. --Roger Guesnerie, College de France Salanie has written an elegant book, concise in its explanations and tightly focused on the most useful models and results of contract theory. His experience in both theory building and theory testing are plain to see in his sure-handed choices, which separate the chaff from the wheat in this huge and growing body of theory. I recommend this book highly to students and newcomers to the economic theory of contracts. --Paul Milgrom, Professor of Economics, Stanford University The first edition of Salanie's book provided an insightful introduction to the modern economics of incentives and contracts. This second edition keeps up with recent advances while maintaining the emphasis on key ideas and intuitions. A great read. --Patrick Rey, IDEI, University of Toulouse

Author Information

Bernard Salanie is Research Fellow of LEI (CREST) in Paris, Professor at Ecole Polytechnique, and managing editor of the Review of Economic Studies, His books include The Microeconomics of Market Failures (2000) and The Economics of Taxation (2003), both published by The MIT Press.

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