Economics 501b: Microeconomics

Spring 2008
9:00-10:20 T TH, Room A002, 77 Prospect Street

Discussion section 3-4:30 TH, Room B8, 28 Hillhouse

Part 1:  Games of Complete Information

Larry Samuelson
30 Hillhouse Avenue, #26
432-6737
Email
Office hours 10:30-11:30  T TH

Part 2:  Games of Incomplete Information and Information Economics

Dirk Bergemann
30 Hillhouse Avenue, #24
432-3592
Email
Office hours 1:30-3:00 T

Teaching assistants:
Gharad Bryan (Email), office hours 1-2:30 Tuesday.
Richard van Weeldon (Email), office hours 4-5:30 Wednesday.

Topic:  This is the second part in the two course sequence in Microeconomic Theory. The first course covered the basic tools of microeconomic analysis. The second course provides an introduction to game theory and information economics.

Game theory is the analysis of strategic interaction among individual agents. Game theory seeks to provide models of conflict and cooperation that are relevant in a large class of situations basic to almost all social sciences. It offers insight into economic, political or social situations in which individuals have different goals and preferences. The basic assumptions of game theory are that decision-makers pursue well-defined objectives (they are rational) and take into account their knowledge or expectations of other decision-makers' behavior (they are strategic).

The first half of this course will introduce basic notions such as action, strategy and equilibrium for complete information environments. The second half extends the theory to cover situations where different agents have different information. This allows game theory to address situations where in which agents have private information that is not readily accessible to all other agents. The resulting asymmetry in information is pervasive in economic relationships: Customers know more about their tastes than firms, firms know more about their own costs than their competitors. As private information changes the nature of the economic relationships, new tools are required to analyze exchange and contracting environments. The basic adverse selection model is introduced first as the relationship between an informed and an uninformed agent. The general theory of mechanism design analyzes the problem of how an uniformed player (principal or designer) can induce privately informed agents to reveal their information. This will leads us, inter alia, to the theory of auctions and related optimal trading problems. In contrast, in signaling models the informed agent attempts to credible convey its information to the uninformed player or the market. Finally, optimal contracts are analyzed in environment where the private information only arises after contracting, which is referred to as the moral hazard problem.

Requirements: Grades will be based on:

25%:  Mid-term exam: Thursday, February 28 (in class)
25%:  Homework
50%:  Final exam:  Date to be announced.

Required texts (available at Labyrinth Bookstore):

  1. Andreu Mas-Collel, Michael D. Whinston and Jerry Green, Microeconomic Theory (Oxford University Press, 1995).
  2. Bernard Salanie, The Economics of Contracts (MIT Press, 2005).

Recommended texts (available at Labyrinth Bookstore):

  1. Patrick Bolton and Matthias Dewatripont, Contract Theory (MIT Press, 2005)
  2. Drew Fudenberg and Jean Tirole, Game Theory (MIT Press, 1991)
  3. Robert Gibbons, Game Theory for Applied Economists (Princeton University Press, 1992)

Other useful sources:

  1. Ken Binmore, Essays on the Foundations of Game Theory (Basil Blackwell, 1990)
  2. Ken Binmore, Playing for Real (Oxford University Press, 2007)
  3. David M. Kreps, A Course in Microeconomic Theory (Princeton University Press, 1990)
  4. David M. Kreps, Game Theory and Economic Modelling (Oxford University Press, 1990)
  5. Jean-Jacques Laffont and David Martimort, The Theory of Incentives (Princeton University Press, 1990)
  6. Jean-Jacques Laffont and Jean Tirole, A Theory of Incentives in Procurement and Regulation (MIT Press, 1993)
  7. George J. Mailath and Larry Samuelson, Repeated Games and Reputations (Oxford University Press, 2006)
  8. Roger G. Myerson, Game Theory (Harvard University Press, 1991)
  9. Martin J. Osborne and Ariel Rubinstein, Bargaining and Markets (Academic Press, 1990)\
  10. Martin J. Osborne and Ariel Rubinstein, A Course in Game Theory (MIT Press, 1994)
  11. Klaus Ritzberger, Foundations of Non-Cooperative Game Theory (Oxford University Press, 2002)
  12. Jean Tirole, The Theory of Industrial Organization (MIT Press, 1988)

Schedule (Homework is due in class on Thursday, one week after being assigned):