Incentive mechanisms in strategic decision making: applications in the credit and labor market

This thesis analyzes incentive mechanisms and optimal responses in agency relationships in different asymmetric-information settings. It begins with a model of the credit market, with a single lender and many potential entrepreneurs, who need external funds to carry out their projects. Some of the borrowers may have the propensity to use the loan received for other illegal or non-contractible purposes, diverting funds from the project financed. Then, an extension of a standard business lending model to the consumer credit market is presented. Agents (households) need loans to bring forward the purchase of a durable good and differ in the likelihood of paying back their debt. The third chapter applies the banking model to the occupational choice of an individual between entering the labor market as a wage worker or as a self-managed entrepreneur. The final chapter presents a labor-market model and analyzes the incentive effects when workers are heterogeneous in their skill levels, unobservable to the employer. In this model, some workers have other-regarding preferences and, in particular, are envious of their more-talented colleagues. Envy can lead to a utility loss for the less-talented and affect the system of incentive contracts. For each model, the design of incentive-compatible contracts is analyzed, and policy implications are drawn.