Self-enforcing contract- contracts that cannot be enforced by a third party

but rely on the parties for enforcement; usually occurs when objective
performance measures (i.e. measures that can be observed and verified) are
not available or highly dysfunctional
Intrinsic motivation- possibility that agent or principal may care about
other partys objectives, even in the absence of any monetary compensation
Equal compensation principal- principle that if two competing tasks
involve equal costs to agent, then compensation structure must reward two
tasks equally on the margin; typically occurs in multitasking problems
Informativeness principle- principle that optimal compensation contract
should include any performance measures that are informative about agents
performance; will reduce risk and improve incentives when agent is risk
averse
Incentive compatibility constraint- constraint that agent will respond to
any given contract by choosing actions that maximize his or her own payoffs;
must be taken into account when agents actions cannot be observed and
verified
Social surplus in P-A relationship- difference between value of
relationship between principal and agent and sum of their outside options;
value of relationship includes expected benefit net of cost of effort and risk
premiums, where benefit depends in part on agents action
Risk premium (as it applies to agent)- perceived disutility by agent from
entering relationship where her compensation depends on outcome that she
cannot perfectly control; includes agents risk averse coefficient and
riskiness of outcome (extent to which agent cannot control outcome)
Statistical significance of regression coefficient- denotes whether
coefficient estimated from sample is likely to be different from 0 if we were
to obtain additional samples; usually evaluated by comparing t-stat
(coefficient divided by standard error) to critical values given a specified
confidence level
Free rider problem- occurs when private marginal benefit from a given
action exceeds social marginal benefit, or when private marginal costs of a
given action is less than the social marginal cost (i.e. public goods, pollution,
tragedy of the commons)