Solutions Manual to Accompany Contract Theory

by Arthur Campbell, Moshe Cohen, Florian Ederer, Johannes Spinnewijn

Overview

The solutions manual for Bolton and Dewatripont's Contract Theory includes complete solutions to 27 of the 54 exercises in the text.

Contract Theory by Patrick Bolton and Mathias Dewatripont, a comprehensive textbook on contract theory suitable for use at the graduate and advanced undergraduate levels, covers the areas of agency theory, information economics, and organization theory and presents many applications in all areas of economics, especially labor economics, industrial organization, and corporate finance. The exercises at the end of the book not only review, chapter by chapter, the basic concepts introduced in the text but also explore additional ideas and applications based on teaching material accumulated over the years by the authors and other instructors of contract theory. The solutions manual to this essential text gives complete solutions to 27 of the 54 exercises in the text, allowing students to study and compare their answers and take greater advantage of this crucial part of the book. The solutions manual follows the structure of the text, grouping exercises by chapter. Chapters 2-6 cover such static bilateral contracting problems as screening, signaling, and moral hazard; chapters 7 and 8 treat multilateral contracting, including auctions, bilateral trade under private information, and multiagent moral hazard; chapters 9 and 10 explore problems of repeated bilateral contracting; and chapters 11-13 cover incomplete contracts, the theory of ownership and control, contracting with externalities, and common agency.

Product Details

ISBN-13:	9780262532990
Publisher:	MIT Press
Publication date:	07/20/2007
Series:	The MIT Press
Edition description:	New Edition
Pages:	152
Product dimensions:	7.00(w) x 9.00(h) x 0.32(d)
Age Range:	18 Years

About the Author

Arthur Campbell is a Ph.D. candidate in Economics at MIT.

Moshe Cohen is a Ph.D. candidate in Economics at MIT.

Florian Ederer is Assistant Professor in the Anderson School of Management, UCLA.

Johannes Spinnewijn is a Ph.D. candidate in Economics at MIT.

Table of Contents

Preface     xi
Introduction     1
Hidden Information, Screening     3
Question 1     3
Question 2     3
Question 3     4
Characterization of First-Best Solution     4
Two Types     5
Continuum of Types     5
Question 4     7
Question 5     7
Entrepreneur's Utility     8
First-Best Solution     8
Second-Best Solution     9
Binding Constraints     10
Low-Type Allocation     11
Full Screening Problem     11
Discussion     12
Competition     12
Hidden Information, Signaling     15
Question 6     15
Question 7     15
Question 8     16
Both Types Invest     16
Only Bad Firms Invest     17
Wasteful Advertising     17
Question 9     18
No Costs of Financial Distress     18
Costs of Financial Distress     20
Hidden Action, Moral Hazard     23
Question 10     23
Randomizing Scheme Cannot Be Optimal     23
Question11     24
Question 12     24
Question 13     25
CEO Compensation     25
Comparison     26
Question 14     27
Question 15     27
Self-Financing     28
Debt-Financing     28
Equity-Financing     30
Question 16     31
Posttakeover Value     31
Bid Price     32
Second Best Contract     32
First Best Contract     33
Disclosure of Private Information     35
Question 17     35
Question 18     35
Ex-Post Payoffs     36
Comparison of Disclosure Regimes     37
Voluntary Disclosure     38
Question 19     38
Unique Optimal Contract     38
Optimal Random Verification     40
Optimal Contract with Risk Averse Entrepreneur     41
Question 20     41
Multidimensional Incentive Problems     43
Question 21     43
Question 22     44
First-Best Outcome     45
Linear Contracts     45
Question 23     47
First-Best Solution      48
Evidence-Based Rewards     53
Decision-Based Rewards     54
Information Disclosure     56
Question 24     57
Bilateral Trading and Auctions     59
Question 25     59
Question 26     60
IC and IR Constraints     60
Efficient Trade     61
Comparison with Myerson-Satterthwaite Theorem     62
Question 27     63
Question 28     63
Question 29     63
Expected Payoff     64
Standard Auctions     65
Optimal Auction     66
Uniform Distribution     66
Multiagent Moral Hazard and Collusion     69
Question 30     69
Attaining the First Best Under Risk Neutrality     70
Risk Aversion     71
Question 31     72
Question 32     73
Optimal Side Contract     74
Restriction to Collusion-Proof Contracts     75
Optimal Collusion-Proof Contract     75
Collusion Impossible     77
Question 33     79
Dynamic Adverse Selection     81
Question 34     81
Question 35      82
Full Commitment     82
No Commitment     84
Question 36     84
Pure Adverse Selection     85
Adverse Selection & Moral Hazard     86
Question 37     87
Dynamic Moral Hazard     89
Question 38     89
Question 39     89
Debt Equals Cash Flow     91
Relaxing the Constraint     91
Optimal Values of Debt     91
Random First-Period Cash Flow     92
Known New Investment Return     92
Need for Short-Term Risky Debt     93
Question 40     93
Characterization of Rational-Expectations Equilibrium     94
First-Period Allocation     95
Positive Return of Firm-Specific Project     95
Incomplete Contracts     99
Question 41     99
Question 42     100
First-Best Allocation of Assets and Investment Levels     101
Optimal Asset Ownership     101
Comparison     103
Ex Post Bargaining with an Outside Option     103
Question 43     104
Question 44     105
Feasibility Constraints     106
Optimal Control Structures     110
Comparison with Aghion & Bolton (1992)     112
Unverifiable Information Contracting     113
Question 45     113
Question 46     114
Question 47     114
Question 48     115
Question 49     115
First-Best Solution     116
No Initial Contract     116
Single-Pair contract     117
At-Will-Contracting Provision     118
No Direct Externalities     120
Question 50     121
First-Best Outcome     122
Null Contract with Renegotiation     122
No Renegotiation     123
Contracting with Renegotiation     123
Discussion     125
Question 51     125
Aghion-Tirole with Quadratic Effort Costs     125
Strong Conflict of Interest     127
Random Choice of Project     128
Markets and Contracts     131
Question 52     131
Observable and Contractible Action     131
Unobservable or Non-Contractible Action     132
Common Agency     133
Question 53     134
Question 54      134
First-Best Solution     135
Joint Contract     135
Common Agency     136
Comparison and Discussion     137
Bibliography     139