In reviewing for my Development Economics midterm tomorrow, I came across this gem of a quote that I wrote down in my class notes.
“Consider this contract a parent could have with his child:
1) If you don’t clean up your room, I’ll thrash you.
2) If you do clean up your room, you get nothing.
You see, I’m creating the right incentives, and I don’t even have to satisfy the participation constraint* because my kid can’t run away!”
And another:
“You can have a negative shock and get a low output, or you can have a positive shock and get high. … That sounded wrong…”
*ensuring that the agent (in this case the kid) has a high enough incentive to accept the contract over any other contracts available to him