Advanced Microeconomics for Contract, Institutional, and Organizational Economics

A graduate textbook on microeconomics, covering decision theory, game theory, and the foundations of contract theory, with a unique focus on the empirical.

This graduate-level text on microeconomics, covering such topics as decision theory, game theory, bargaining theory, contract theory, trade under asymmetric information, and relational contract theory, is unique in its emphasis on the interplay between theory and evidence. It reviews the microeconomic theory of exchange “from the ground up,” aiming to produce a set of models and hypotheses amenable to empirical exploration, with particular focus on models that are useful for the study of contracts, institutions, and organizations. It explores research that extends price theory to the exchange of commodities when markets are incomplete, discussing recent developments in the field.
            Topics covered include the relationship between theory and evidence; decision theory as it is used in contract theory and institutional design; game theory; axiomatic and strategic bargaining theory; agency theory and the class of models that are considered to constitute contract theory, with discussions of moral hazard and trade with asymmetric information; and the theory of relational contracts. The final chapter offers a nontechnical review that provides a guide to which model is the most appropriate for a particular application. End-of-chapter exercises help students expand their understanding of the material, and an appendix provides brief introduction to optimization theory and the welfare theorem of general equilibrium theory. Students are assumed to be familiar with general equilibrium theory and basic constrained optimization theory.Preface xi
1 Introduction 1
2 Evidence, Models, and Decision Making 17
3 Decision Theory 35
4 Game Theory 65
5 Bargaining and the Buyer-Seller Model 103
6 Reliance, Holdup, and Breach 129
7 Insurance and Moral Hazard 173
8 Trade with Asymmetric Information 205
9 Relational Contracts 257
10 Opportunism and Conflict in Agency Relationships 299
11 Summary 335
Appendix 353
Notes 363
References 373
Index 389“Advanced Microeconomics is unique in how it combines theoretical foundations with rigorous evidence. It will fascinate everybody with a deep interest in the contractual and organizational foundations of modern capitalism.”
—Ernst Fehr, Professor of Economics, University of Zurich
 
“A tour de force of modern micro theory that covers key areas for the study of labor and organizational economics, with insights that will be especially helpful for people who want to catch up on state-of-the-art approaches and use them in their own research.”
—David Card, Class of 1950 Professor of Economics, University of California, Berkeley; recipient of the 2021 Nobel Prize in Economic Sciences
 
“This is a terrific book, excellent for a graduate microeconomics course. One of its strengths is the discussion of observed evidence and the possible links between theory and reality. For that reason, it is likely to be useful to empiricists as well as theorists.”
—Kate Ho, Professor of Economics, Princeton University

“Bentley MacLeod’s book provides a great treatment of the essential microeconomic ideas that underlie the areas of contracts and organizations. Full of engaging examples and applications, it will be invaluable for budding applied theorists and also a terrific resource for those already working in these areas.”
—Oliver Hart, Lewis P. and Linda L. Geyser University Professor, Harvard University; recipient of the 2016 Nobel Prize in Economic SciencesW. Bentley MacLeod is Sami Mnaymneh Professor of Economics, Professor of International and Public Affairs, and Affiliated Law Faculty at Columbia University.