1. Chapter 2 The Base Model Stefan P. Schleicher University of Graz Economics of Information Incentives and Contracts

2. 2.Description of the model (1) Bilateral relationship described by principal-agent contract Principal designs and proposes contract Contract implies for agent to carry out some task Agent decides if she signs the contracts Outcome x is a random variable, determined by agent’s effort e

3. 2.Description of the model (2) Principal’s utility B(.) depends on outcome x and payoff w made to the agent Risk-neutral or risk-avers Agent’s utility U(.,.) depends on payoff w and effort e Risk-neutral or risk-avers Disutility of effort Reservation utility

4. 3.Symmetric information contracts (1) Principal and agent have the same information Principal designs efficient contract - acceptable to agent - demanded effort achieved - cheapest costs [P 2.1 ]

5. 3.Symmetric information contracts (2) First-order condition for [P 2.1 ]

6. 3.1The optimal payments mechanism (1) Optimal distribution of risk from [P 2.1 ]

7. 3.1The optimal payments mechanism (2) Principal and agent risk-avers

8. 3.1The optimal payments mechanism (3) Principal risk-neutral and agent risk-avers

9. 3.2The optimal level of effort (1) ASSUMPTION: Principal is risk-neutral and agent risk-avers

10. 3.2The optimal level of effort (2)

11. 3.2The optimal level of effort (3)

12. 3.2The optimal level of effort (4)