Contract theory studies the design of contractual, legal, and organizational arrangements in the presence of asymmetric information. The conceptual tools of contract theory, focusing on moral hazard, adverse selection and screening problems, are applied to a broad set of topics, including the design of managerial incentive systems, financial contracts, financial regulation, financial reporting, as well as the allocation of control and decision rights.
The objective of the course is to provide participants with the knowledge to understand and analyse theoretical papers on a broad range of information problems in finance and accounting. Topics include, for example, managerial compensation, earnings management, myopic investment, voluntary and strategic disclosure, financial stability, and covenants.
The course consist of lectures, exercises, and paper discussions.
- I follow the book Contract Theory by Patrick Bolton and Mathias Dewatripont to develop the foundations of key concepts.
- The lectures will be accompanied by problem sets, which I will distribute in class. We will discuss the solutions to some of the exercises in class.
- Each student has to present one paper, which is assigned in the first session.
Successful completion of the class requires active class participation, preparation and discussion of exercises, a paper presentation, and participation in a final exam. Participants are required to work through the relevant chapters in Contract Theory and selected papers. It is essential that all participants try to solve the exercises prior to the discussion of the solution in class. The final grade is based on:
- Class participation 1/3
- Paper presentation 1/3
- Exam 1/3