Contract Theory in Finance and Insurance (MASTER)

The course focuses on the asymmetric information between the agent and principal, which causes informational problems, such as moral hazard, adverse selection and signaling. Information asymmetry causes the equilibrium to move away from the first best, in which all the participants would have symmetric information. This explains and gives guidance for various problems in corporate finance, financial intermeditation theory and insurance. The course highlights, how the insurance companies mitigate moral hazard and adverse selection problems (e.g., through the contracts with different premia and coverages).

The course analyses the relationship between a principal and agent with a prime focus on informational problems in the context of finance and actuarial science. After the overview of microeconomics foundations students are equiped with main concepts of Contract theory. Even though Contract theory in general builds on complex mathematical tools, the course uses simple mathematical models to illustrate real problems in finance, banking and actuarial science. In doing so, the course develops economic intuition and connects it with the mathematical framework. Such combination equips the students with the model building skills that can be directly applicable in the real world.