The Economics of Contracts

Although it is one of the major achievements in the history of economic thought, the general equilibrium model is not completely satisfactory as a descriptive tool. In the 1970s several economists settled on a new way to study economic relationships that is often called the "economics of information." The theory of contracts is one of its main building blocks. The theory of contracts uses partial equilibrium models that take into account the full complexity of strategic interactions between privately informed agents in well-defined institutional settings. The models sum up the constraints imposed by the prevailing institutional setting through a contract, either explicit or implicit. They make intensive use of noncooperative game theory with asymmetric information. The Economics of Contracts introduces graduate students and nonspecialist professional economists to the theory of contracts. It grew out of a course Professor Salanié gave to third-year Stanford graduate students and third-year students at the Ecole Nationale de la Statistique et de l'Administration Economique. The book focuses on the methods used to analyze the models, but also discusses a few of the many applications the theory has generated in various fields of economics. The author's goal is to give readers the basic tools to create their own applications.