Hola! We are reblogging an excellent post (see below) from Kevin Bryan, a professor of strategy at the University of Toronto Rotman School of Management, summing up some of the work of the most recent recipient of the Nobel Prize in Economics, Jean Tirole. (Professor Bryan’s blog, a favorite of ours, is called A Fine Theorem.) The blog post below explains Jean Tirole and Eric Maskin’s work on “incomplete contracts.” Notice how the economic approach to contracts differs from the legal or doctrinal approach.
A Nobel Prize for applied theory – now this something I can get behind! Jean Tirole’s prize announcement credits him for his work on market power and regulation, and there is no question that he is among the leaders, if not the world leader, in the application of mechanism design theory to industrial organization; indeed, the idea of doing IO in the absence of this theoretical toolbox seems so strange to me that it’s hard to imagine anyone had ever done it! Economics is sometimes defined by a core principle that agents – people or firms – respond to incentives. Incentives are endogenous; how my bank or my payment processor or my lawyer wants to act depends on how other banks or other processors or other prosecutors act. Regulation is therefore a game. Optimal regulation is therefore a problem of mechanism design, and we now have mathematical tools that…
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prior probability 