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An Introduction to the Theory of Incentives

The two fundamental models in the theory of incentives address problems due to hidden information, and problems due to hidden action. This introduction will mainly focus on models of hidden information. For example, a regulated firm may want to overstate cost to obtain a higher regulated price, while a buyer may be keen to under-report willingness to pay to obtain a lower price. Addressing these concerns may lead to quantity and quality distortions (e.g., restrictions in airline travel). A goal is to illustrate the similarity in the mathematical structure of several prominent incentive problems, e.g., Firm Regulation, Price Discrimination, and Income Taxation. I will also outline briefly some of my own research on related topics