# 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.