Introduction to Moral Hazard and Adverse Selection
In the first half of the book we usually assumed that the players had perfect information: everyone had all of the information available about the choices and payoffs. Similarly, in most basic economics courses we assume the same thing: We all know the quality of the products, the prices everyone is charging, and the productivity of our employees. However, there are many real-world situations where we do not know these things. Many of these complications are discussed in an area of economics called “principal–agent models,” or sometimes the “theory of contracts.”
The way we will explore this material is to set out the basic framework in this chapter and give ...
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