Economics of Incentives

The details
Colchester Campus
Postgraduate: Level 7
Sunday 17 January 2021
Friday 26 March 2021


Requisites for this module



Key module for

MSC L10412 Management Economics,
MSC L104JS Management Economics,
MECNL133 Management Economics,
MECNL134 Management Economics (Including Placement Year),
MECNL135 Management Economics (Including Year Abroad)

Module description

Description: This module incorporates basic "principal-agent" contract theory in the context of hidden information and hidden actions, the modern theory of the firm, and incentive theory in light of empirical evidence, incorporating recent behavioural models. Applications include the optimal compensation of CEO's, the "make or buy" decision, motivating team performance, and the impact of an altruistic manager.

Feedback for this module will occur through class meetings where we will go over the answers to problem sets and where you will be able to ask questions about your own method of solution; answers that will be posted on the website for the module that will give you written guidance on the appropriate method to approach the problems, assignments, and tests; and office hours where any additional questions can be addressed. You should be sure that you use these methods to understand how to improve your own performance.

Learning outcomes: Students should come away with a good intuitive and formal understanding of the basics of contract theory, incentive theory, and the theory of the firm. They should understand how to apply these to real world issues in policymaking, finance, and management, how these fit into the broader economic models and discussion, and to use this in conducting research. In this context, they should be able to set up a simple formal model, understand its key assumptions and components, derive its predictions, explaining the intuition behind these results. They should also have an understanding of how these models have been examined and tested empirically, and some awareness of and appreciation for cutting-edge research in this area, including behavioural critiques. In completing examinations, students will demonstrate their problem-solving analytical and deductive skills

Key and Employability Skills: The students should attain a deeper understanding of the principles behind compensation schemes, and the trade-offs at play in setting incentives. They will also gain a broad understanding of key issues related to the scope of the firm that will be relevant to private enterprise decisions, merger analysis, and government procurement. The student will gain logical thinking skills, and the ability to build a model distilling the essence of the problem, abstracting from complications, but being aware of the costs of such simplifications. They will learn to discuss economic theory in plain language, relating this to real world issues and empirical data. This module incorporates literacy and numeracy skills, as well as research, and communication skills.

Module aims

No information available.

Module learning outcomes

No information available.

Module information

No additional information available.

Learning and teaching methods

A 2 hour lecture and a 1 hour class per week. Some of the lectures may take the form of seminars led by the course supervisor. The students must come prepared for classes and lectures, and ready to participate.


  • (1988-10-01) 'Two-Sided Uncertainty and "Up-or-Out" Contracts', in Journal of Labor Economics. vol. 6 (4) , pp.423-444
  • (1981-10-01) 'Rank-Order Tournaments as Optimum Labor Contracts', in Journal of Political Economy. vol. 89 (5) , pp.841-864
  • Prendergast, C. (1993-05-01) 'The Role of Promotion in Inducing Specific Human Capital Acquisition', in The Quarterly Journal of Economics. vol. 108 (2) , pp.523-534
  • Jean-Jacques Laffont; David Martimort. (2002) The theory of incentives: the principal-agent model, Princeton, NJ: Princeton University Press.
  • Simon, Carl P.; Blume, Lawrence. (1994) Mathematics for economists, New York: Norton.
  • Holmstrom, Bengt. (1982-23) 'Moral Hazard in Teams', in The Bell Journal of Economics. vol. 13 (2) , pp.324-

The above list is indicative of the essential reading for the course. The library makes provision for all reading list items, with digital provision where possible, and these resources are shared between students. Further reading can be obtained from this module's reading list.

Overall assessment

Coursework Exam
50% 50%


Coursework Exam
50% 50%
Module supervisor and teaching staff
Dr Karen Khachatryan, email:
Dr Karen Khachatryan
For further information, send a message to



External examiner

Dr Francis Kiraly
Newcastle University
Lecturer Economics
Available via Moodle
No lecture recording information available for this module.


Further information

* Please note: due to differing publication schedules, items marked with an asterisk (*) base their information upon the previous academic year.

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