The Theory of Incentives: The Principal‐Agent Model.

The Theory of Incentives: The Principal‐Agent Model is the first of a planned, series of books by J. J. Laffont and D. Martimort that aim at a synthesis and systemisation of the Theory of Incentives. As its subtitle suggests this book focuses on the Principal‐Agent Paradigm. In particular this book focuses on how, in an environment where contracts can be enforced, a principal could minimise the efficiency losses that arise when he delegates certain tasks to an agent who has different objectives than the ones of the principal and when information about the agent is problematic. One information problem is that the agent may possess superior information relative to the principal over certain aspects of the relationship. This private information can be of two types: either the agent can take an action unobserved by the principal, or the agent has some private knowledge about exogenous characteristics of hers that are pertinent to the relation. The book also deals with another type of information problem the principal may be faced with: the case of nonverifiability. This case emerges when no third party can verify information that is shared ex post by the principal and the agent. In this case, even if the principal and the agent possess symmetric information over the distribution that governs the realisation of the state of the world as well as over the realised state of the world, state‐contingent contracts written at the ex ante stage cannot be enforced at the ex post stage.