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Master EconomicsUE Incentives theory


The aim of this course is to present the main issues coming from the need to provide incentives (through mechanism or contract) in the presence of information asymmetries. It will highlight the contributions of the theory of incentives to many economic issues (in IO, public economics, macroeconomics, finance and insurance…) and present the recent developments (extrinsic motivation, behavioral biases).

Course outline :

1. Introduction : the principal-agent model and mechanism design

2. The case of adverse selection

2.1. The basic model

2.2. Applications and extensions

2.3. Signaling models

2.4. Dynamic aspects : the issue of commitment

3. The issue of moral hazard

3.1. Reminder on the basic model

3.2. Applications and extensions

3.3. Moral hazard in teams

3.4. Dynamic aspects : career concerns

4. The contribution of the theory of incentive in the main economic fields

4.1. Contributions to IO : Procurement and Optimal regulation

4.2. Contributions to public economics : Optimal taxation and Public-Private Partnerships

4.3. Contribution to Macroeconomics : Efficiency wage

5. The limits of the theory of incentives

5.1. Countervailing incentives

5.2. Behavioral aspects : intrinsic motivation and altruism

Professional skills

  • Understand how contract specificities can allow extracting information
  • Understand the specific patterns of dynamic (or repeated) relationships
  • Apprehend the limits of the theory of incentives

Language used

Main language used by this course: Anglais.



  • The Economics of contracts, B. Salanié, MIT Press
  • The Theory of incentives, J.-J. Laffont and D. Martimort, Princeton University Press
  • A Theory of Incentives in Procurement and Regulation, J.-J. Laffont and J. Tirole, MIT Press


  • Aghion, P., and Jackson, M. O., « Inducing Leaders to Take Risky Decisions : Dismissal, Tenure, and Term Limits. » American Economic Journal : Microeconomics, 8(3) : 2016
  • Alger, I., & Weibull, J. W., Kinship, Incentives, and Evolution. American Economic Review, 100(4), 2010
  • Bénabou, R. and Tirole, J., Intrinsic and Extrinsic Motivation, The Review of Economic Studies, 70(3), 2003
  • Gibbons, R., Murphy, K., Optimal Incentive Contracts in the Presence of Career Concerns : Theory and Evidence. Journal of Political Economy, 100, 1992
  • Holmstrom, B., Moral Hazard in Teams. Bell Journal of Economics, 13(2), 1982
  • Holmstrom, B., Milgrom, P., Multitask Principal–Agent Analyses : Incentive Contracts, Asset ownership, and Job Design. Journal of Law, Economics, and Organization, 7, 1991
  • Lewis, T. R. and Sappington, D., Countervailing incentives in agency problems, Journal of Economic Theory, 49(2), 1989

Fundamental prerequisites

Knowledge in microeconomics and mathematics (real analysis, differential calculus and integrals).

Recommended prerequisites

Basic knowledge in decision theory.

Structure and organisation

The course is composed of 24 hours of lectures. The first 12h are taught by Renaud Bourlès, the other 12 by Dominique Henriet. An assignment is due at the end of the first 12 hours. An oral presentation takes place at the end as final exam.

Volume of teachings

  • Lectures: 24 hours

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