Agency: Incentives and Asymmetric Information

This lecture explores the concept of agency, focusing on the principal-agent model and the optimal contract design. It delves into the importance of incentives in aligning the interests of agents with principals, highlighting the challenges posed by asymmetric information where agents have more knowledge than principals. The lecture discusses how agency relationships are pervasive in economic and non-economic contexts, illustrating examples such as landowner/farmer and shareholder/CEO relationships. It also covers the implications of asymmetric information, including moral hazard and adverse selection, and how agents can exploit their informational advantage. Additionally, the production technology and contract design in the presence of asymmetric information are examined.