Economics of Business 1: Contracts and Governance

Economics of Business 1: Contracts and Governance

Year: 2018-19
Course code: ECON4007
Course credits: 15
Taught: Semester  1
Course co-ordinator: Dr Michele Lombardi
Entry requirements: Normally admission to an honours programme in Economics.
Available to visiting students:Yes
Contact for more information: Gillian Weir

Course description

The main aims of this course are: to present an analysis, using the approach and techniques of modern economics, of the co-ordination and motivation problems that arise due to increasing specialization, and the potential solutions to these problems in the form of various types of contracts and governance structures. The first part of the course discusses the benefits of specialization and exchange and the associated coordination and motivation problems. We then introduce the non-cooperative game along with the Nash and sub-game perfect equilibrium concepts. The second part of the course discusses complete and complete contingent contracts. We start by examining the ingredients of the principal-agent model and the behavioural assumptions that underlie it. We then analyze the hidden action and hidden characteristics problems under complete and incomplete information, and present various solutions to these problems. The third part of the course examines incomplete contracts. We start by discussing transaction costs and how they affect specific investments, and then proceed to analyze the relationship between ownership rights and the choice of governance structure. In the final part of the course, we move away from single-period formal (complete or incomplete) contracts and discuss self-enforcing contracts which deal with informal repeated relationships.

Learning and teaching methods

20 hours of lectures (10 x 2 hours), Monday, 10.00 am-12.00 noon, and 5 1-hour tutorials (held fortnightly at varying times).

Course texts

There is no textbook for the course. A list of general references that students may wish to consult is given below.

Campbell, D.E. (2006), “Incentives, Motivation and the Economics of Information (Second Edition),” Cambridge University Press.
Macho-Stadler, I., Pérez-Castrillo, J.D. (2001), “An Introduction to the Economics of Information: Incentives and Contracts (Second Edition),” Oxford University Press.
Milgrom, P., Roberts, J.E. (1992), “Economics, Organization & Management,” Prentice Hall, 1992.
Molho, I. (1997), “The Economics of Information: Lying and Cheating in Markets and Organizations”, Wiley-Blackwell.
Wofstetter, E. (1999), “Topics in Microeconomics: Industrial Organization, Auctions, and Incentives”, Cambridge University Press.


A 1-hour in-course exam (30%)
A 2-hour degree exam (April/May) (70%)