What is Contract Theory?
Within the realm of economics, contract theory has to do with understanding how the balance between competency and rewards is achieved. Essentially, contract theory involves the need for communication between an agent and a principal, so that there is a clear understanding of both the needs of the principal and the ability of the agent to meet those needs in a competent manner. Once this state is established, contract theory is then employed to ensure that the agent receives adequate rewards for his or her efforts. One of the easiest ways to understand contract theory is to apply the principle to hiring persons to labor in the workplace. Essentially, a prospective employee will provide information about his or her ability to meet the requirements of a given position. In turn, the employer will need to be in a position to verify the accuracy of the information provided. When the employer is unable to do so, the condition is understood to be asymmetric. Asymmetric information is not nece
