Contract Theory
This book introduces contract theory through a structured, example-driven approach. It focuses on key topics such as adverse selection, signaling, and warranties, using real-world scenarios to illustrate how contracts function under conditions of incomplete information. Each chapter includes numerical exercises designed to guide readers through the logic and mechanics of contractual decision-making. The material is organized to support both classroom instruction and independent study, making it suitable for upper-level undergraduates, graduate students, and professionals seeking a practical understanding of contract theory.
Readers will gain a working knowledge of contract theory by solving step-by-step exercises that reinforce core concepts. The book equips students to apply these ideas in job markets and consumer decisions, such as negotiating employment terms or evaluating warranty offers. Instructors will find the examples useful for teaching advanced topics and supporting capstone projects. By combining clarity with technical depth, the textbook serves as a practical resource for anyone looking to understand and apply contract theory without requiring extensive prior training in economics.
Pitch to PD 86 if this will become a textbook: Many instructors and students encounter contract theory through highly technical texts that assume a strong background in economics and mathematical modeling. While the foundational concepts are widely studied and applied in fields like law, business, and public policy, the instructional materials often lack accessible examples and practical exercises. This limits broader engagement with the subject, especially for those outside specialized economics programs. The need to present contract theory in a way that is both rigorous and approachable has motivated the development of this textbook.
Ana Espinola-Arredondo is Professor in the School of Economic Sciences at Washington State University. She is co-editor-in-chief of Environmental and Resource Economics (ERE) and International Review of Environmental and Resource Economics (IRERE), and co-editor in Economic Inquiry. Her research interest focuses on applications of game theory to environmental issues. She has extensively examined the strategic effects of environmental regulation on firms’ profit and consumers’ behaviour. Espinola-Arredondo has written and published several books, including Game Theory (Palgrave Macmillan, 2023).
Felix Muñoz-Garcia is Professor of Economics at Washington State University and Coeditor-in-Chief of Economics of Governance. He has taught microeconomics-related courses for over 15 years at Washington State University, the University of Pittsburgh, the University of Wyoming, Loyola University (Sevilla Campus), and the University of Granada, Spain. His field of research are game theory and industrial organization, with applications to settings of incomplete information. He is the coauthor of Game Theory (Palgrave Macmillan, 2023).
Pak-Sing Choi is Assistant Professor of Economics at National Central University in Taiwan. He has taught courses on game theory, auctions and contracts, microeconomic theory, industrial economics, and managerial economics. His research lies in the intersection of environmental economics, industrial organization, and international trade, addressing firm behavior and transborder regulation in incomplete information settings.