👉 Contracts math, or mathematical contract theory, is a branch of economics that applies mathematical and statistical techniques to analyze and design contracts in situations where parties have incomplete information about each other's types or preferences. It focuses on creating mechanisms that align incentives and reduce risks, ensuring fair outcomes even when one party knows more than the other. Key concepts include Bayesian games, where players have probabilistic beliefs about others' types; mechanism design, which involves creating rules to achieve desired outcomes (like truthful revelation of information); and incentive compatibility, ensuring that truth-telling is the best strategy for each party. By modeling these interactions mathematically, contracts math helps design contracts that mitigate adverse selection, moral hazard, and other informational asymmetries, leading to more efficient and equitable agreements.
