Statistical Contract Theory

# 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](https://unitedmasters.com/)
  - 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 [vake.works](https://vake.works/pledge)
  - 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
  - Deep dives into various *natural living systems experiments* by clicking `Play All` and pausing, playing or forwarding as needed at playlists/podcasts at:
    - [@livingsystems_vakeworks channel](https://www.youtube.com/@livingsystems_vakeworks)
- Reference Readings:
    - [Michael Jordan UC Berkeley & Statistical Contract Theory Play List](https://www.youtube.com/playlist?list=PL_I1mOIPmfpb6u2JekTNSMdcyq-jayI8S)
    - [The Theory of Incentives: The Principal-Agent Model](https://press.princeton.edu/books/paperback/9780691091846/the-theory-of-incentives), Jean-Jacques Laffont and David Martimort, Princeton University Press, 2002, ISBN: 9780691091846.
    - [Contract Theory](https://mitpress.mit.edu/9780262025768/contract-theory/), Patrick Bolton and Mathias Dewatripont, The MIT Press, 2014, ISBN: 9780262025768.
    - [A Course in Microeconomic Theory](https://press.princeton.edu/books/paperback/9780691202754/a-course-in-microeconomic-theory), David M.. Kreps, Princeton University Press, 2020, ISBN: 9780691202754.