Contracts, Information and Incentives in Organizations

Bachelor 2021/2022

Type: Elective course (HSE/NES Programme in Economics)

Area of studies: Economics

Delivered by: HSE/NES Undergraduate Programmes Curriculum Support

Where: Faculty of Economic Sciences

When: 2 year, 3, 4 module

Mode of studies: offline

Open to: students of one campus

Instructors: Tatiana Mayskaya

Language: English

ECTS credits: 6

Contact hours: 64

Full Syllabus Ask Question

Abstract

The first part of this course provides an introduction to the Economics of Information. This field was a revolution in economics, overturning long standing presumptions, including the one of market efficiency. This had deep implications for economic policy. Economics of Information looks at situations where one of the contracting parties have private information. We will focus on settings with two parties: a principal (e.g. firm owner) and an agent (e.g. worker). The principal delegates a task to the agent who will obtain some private information as a result. This private information can be of two types: either the agent can take a hidden action (known as moral hazard); or the agent has some private knowledge (known as adverse selection). How should the principal cope with this situation? In the context of organizations, we will see how firm’s owners succeed in aligning the objectives of its various members, such as workers, supervisors, and managers, with profit maximization. The second part of the course revolves around the Economics of Organizations. Neoclassical economics traditionally viewed a firm as a production set. Given market prices, the firm chooses a set of inputs to buy, turns them into outputs, and then sells those outputs on the market in order to maximize profits. This "black box" view of the firm captures many important aspects of what a firm does, but leaves many questions unanswered: why do firms exist?, why some firms decide to buy inputs and others to make them?, what do managers do?, what is the role of hierarchy?, why do firms often appear dysfunctional?, why do inefficient and efficient firms coexist?, should we care about their coexistence? The purpose of this course is to move beyond the Neoclassical view of the firm and to provide you with a set of models that you can use as a first step when thinking about modern

Learning Objectives

The aim of this course is to move beyond the Neoclassical view of the firm and to provide students with a set of models that you can use as a first step when thinking about modern issues affecting private and public organizations.

Expected Learning Outcomes

Can participate in the development of options for management decisions, justifying their selection based on criteria of socio-economic efficiency, risks and possible socio-economic consequences of decisions
Understands models with a common principalagent framework

Course Contents

Adverse selection
Moral hazard
Informal incentives
Management by incentives
Delegation
Boundaries of the firm

Assessment Elements

Home assignments
25%, not blocking
Midterm
25%, not blocking
Final test
40%, blocking
Case studies
10%, not blocking

Interim Assessment

2021/2022 3rd module
0.25 * Home assignments + 0.4 * Final test + 0.25 * Midterm
2021/2022 4th module
0.4 * Final test + 0.25 * Home assignments + 0.25 * Midterm

Bibliography

Recommended Core Bibliography

Besanko, D. (2016). Economics of Strategy (Vol. 7th edition). Hoboken: Wiley. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=1639494
Laffont, J.-J., & Martimort, D. (2002). The Theory of Incentives : The Principal-Agent Model. Princeton, N.J.: Princeton University Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=329691
Patrick Bolton, & Mathias Dewatripont. (2005). Contract Theory. The MIT Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.b.mtp.titles.0262025760

Recommended Additional Bibliography

Aghion, P., & Tirole, J. (1997). Formal and Real Authority in Organizations. https://doi.org/10.1086/262063
Andrei Markevich, & Ekaterina Zhuravskaya. (2011). M-form hierarchy with poorly-diversified divisions: A case of Khrushchev’s reform in Soviet Russia. Post-Print. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.p.hal.journl.halshs.00754499
Baker, G., Gibbons, R., & Murphy, K. J. (1994). Subjective Performance Measures in Optimal Incentive Contracts. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsbas&AN=edsbas.F35CAF5D
Bengt Holmstrom, & Paul Milgrom. (1991). Multitask principal-agent analyses: incentive contracts, asset ownership, and job design. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsbas&AN=edsbas.ADCF52CD
Dessein, W. (2002). Authority and Communication in Organizations. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsbas&AN=edsbas.E0B18963
Garicano, L., & Rayo, L. (2015). Why organizations fail: models and cases. CEPR Discussion Papers. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.p.cpr.ceprdp.10395
George P. Baker, & Thomas N. Hubbard. (2004). Contractibility and Asset Ownership: On-Board Computers and Governance in U. S. Trucking. The Quarterly Journal of Economics, (4), 1443. https://doi.org/10.1162/0033553042476152
Grossman, S. J., & Hart, O. (1985). The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration. CEPR Discussion Papers. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.p.cpr.ceprdp.70
Hart, O. D., & Moore, J. (1990). Property Rights and the Nature of the Firm. https://doi.org/10.1086/261729
Holmström, B. (1999). Managerial Incentive Problems: A Dynamic Perspective. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsbas&AN=edsbas.90525380
Holmstrom, B., & Milgrom, P. (1994). The Firm as an Incentive System. American Economic Review, (4), 972. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.a.aea.aecrev.v84y1994i4p972.91
Macchiavello, R., & Morjaria, A. (2013). The Value of Relationships: Evidence from a Supply Shock to Kenyan Rose Exports. CEPR Discussion Papers. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.p.cpr.ceprdp.9531
Paul Glewwe, Nauman Ilias, & Michael Kremer. (2003). Teacher Incentives. NBER Working Papers. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.p.nbr.nberwo.9671
Paul Joskow. (1984). Vertical Integration and Long Term Contracts: The Case of Coal Burning Electric Generating Plants. Working Papers. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.p.mit.worpap.361
Silke Januszewski Forbes, & Mara Lederman. (2009). Adaptation and Vertical Integration in the Airline Industry. American Economic Review, (5), 1831. https://doi.org/10.1257/aer.99.5.1831
Tirole, J. (1986). Hierarchies and Bureaucracies: On the Role of Collusion in Organizations. Journal of Law, Economics, and Organization, (2), 181. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.a.oup.jleorg.v2y1986i2p181.214
Wouter Dessein, & Tano Santos. (2006). Adaptive Organizations. Journal of Political Economy, (5), 956. https://doi.org/10.1086/508031

Course Syllabus