Keyboard shortcuts

Press ← or → to navigate between chapters

Press S or / to search in the book

Press ? to show this help

Press Esc to hide this help

Statistical Contract Theory

Basics of the Principal-Agent Model under Information Asymmetry.

  • Main Assumptions

    • An agent and a principal enter into a contract with their own self-interests
    • Coercive powers of a State exist (Courts can enforce contracts)
    • There is information asymmetry:
      • agent won't share crucial private information with principal or vice versa

  • It's a take-it-or-leave-it contract from principal to agent

  • Example 1: Airline industry

    • Principal is airline; agent is passensger;
    • information hidden from principal: the maximum price an agent is willing to pay per trip
    • Story: how was the airline industry rescued by contract theory half a century ago?

  • Example 2: Streaming Music Indusrty - United Masters

    • Principal-S is a streaming service provider, eg.spotify, disney music, YouTube Music, etc.
    • Agent-P is a musician producing music
    • Agent-C is a listener consuming music
    • Traditional contract: Agent-P <- Principal-S -> Agent-C
    • United Masters as Principal-UM have a different contract model:
      • Agent-P <- Principal-UM -> Agent-S, where Agent-S is a streaming provider

  • Example 3: Food Industry - Radically Transparent Food Networks at www.shop.vake.works

    • Food reaches from producer or farmer to eater through a sequence of pairwise contracts between different types of agent-principal pairs.
    • Consider charcuterie made of beef, salt and pepper, then the following pairs may exist before it reaches the eater:
      • producer-processor (eg. slaughterer, butcher, packager, cold-chain provider)
      • processor-transporter, transporter-distributor, distributor-exporter, exporter-importer, importer-distributor, distributor-retailer
      • retailer-eater

  • Reference Readings: