Module Details

EC951-7-AU-CO: Economics Of Incentives, Contracts And The Firm

Year: 2017/18
Department: Economics
Essex credit: 20
ECTS credit: 10
Available to Study Abroad / Exchange Students: Yes
Full Year Module Available to Study Abroad / Exchange Students for a Single Term: No
Outside Option: No

Supervisor: Dr Karen Khachatryan
Teaching Staff: Dr Karen Khachatryan
Contact details: For further information, send a message to

Module is taught during the following terms
Autumn Spring Summer

Module Description

Description: This module incorporates basic "principal-agent" contract theory in the context of hidden information and hidden actions, the modern theory of the firm, and incentive theory in light of empirical evidence, incorporating recent behavioural models. Applications include the optimal compensation of CEO's, the "make or buy" decision, motivating team performance, and the impact of an altruistic manager.

Feedback for this module will occur through class meetings where we will go over the answers to problem sets and where you will be able to ask questions about your own method of solution; answers that will be posted on the website for the module that will give you written guidance on the appropriate method to approach the problems, assignments, and tests; and office hours where any additional questions can be addressed. You should be sure that you use these methods to understand how to improve your own performance.

Learning outcomes: Students should come away with a good intuitive and formal understanding of the basics of contract theory, incentive theory, and the theory of the firm. They should understand how to apply these to real world issues in policymaking, finance, and management, how these fit into the broader economic models and discussion, and to use this in conducting research. In this context, they should be able to set up a simple formal model, understand its key assumptions and components, derive its predictions, explaining the intuition behind these results. They should also have an understanding of how these models have been examined and tested empirically, and some awareness of and appreciation for cutting-edge research in this area, including behavioural critiques. In completing examinations, students will demonstrate their problem-solving analytical and deductive skills

Key and Employability Skills: The students should attain a deeper understanding of the principles behind compensation schemes, and the trade-offs at play in setting incentives. They will also gain a broad understanding of key issues related to the scope of the firm that will be relevant to private enterprise decisions, merger analysis, and government procurement. The student will gain logical thinking skills, and the ability to build a model distilling the essence of the problem, abstracting from complications, but being aware of the costs of such simplifications. They will learn to discuss economic theory in plain language, relating this to real world issues and empirical data. This module incorporates literacy and numeracy skills, as well as research, and communication skills.

Learning and Teaching Methods

A 2 hour lecture and a 1 hour class per week. Some of the lectures may take the form of seminars led by the course supervisor. The students must come prepared for classes and lectures, and ready to participate.


50 per cent Coursework Mark, 50 per cent Exam Mark


Mid-term test

Exam Duration and Period

2:00 during Summer Examination period.


  • Bernard Salanie, The Economics of Contracts: A Primer, MIT Press, 2nd Ed, 2005. The lectures will closely follow this book; it is concise, clear, and mathematically rigorous.
  • Roberts, J. (2007). The modern firm: Organizational design for performance and growth. Oxford University Press. This one is 'nearly' a required text.
  • J.J. Laffont and D. Martimort (2002), The Theory of Incentives, Princeton University Press, 2002. This has the mathematical modelling. They generally take a 'brute force' approach to solutions and proofs. (See also a more basic text by George Hendrikse)
  • Milgrom and J. Roberts, Economics, Organization & Management, Prentice Hall, 1992. Try to have access to this, but I wouldn't recommend buying it.
  • Botong Koszegi , Behavioral Contract Theory, Journal of Economic Literature (2014), 52(4), pp. 1075-1118. We will go through that paper after having covered basic contract theory.
  • Note: Lecture notes, articles, and case studies are at least as important as the books.

Further information