The goal of the course is to make the students familiar with the economics of uncertainty and incomplete information and the basics of behavioral economics.
Part 1: Incomplete Information
Part 2: Behavioral Economics
- Student should know and understand the basic models and results associated to moral hazard and adverse selection (70s, early 80s)
- Students should be able to make their own small principal-agent models (screening / moral hazard) and be able to work out small extensions of those models.
- Students become accustomed to more recent topics in contract theory (e.g. dynamics, delegation).
After taking this part of the course, students will be able to
- solve for the partial equilibrium in models with externalities and public goods;
- solve for the general equilibrium in both pure-exchange economies and models with production;
- prove the two fundamental theorems of welfare economics; and
- prove existence, uniqueness and stability of equilibria under a variety of different assumptions.
All non-CentER students should ask formal permission from the Director of Graduate Studies in Economics BEFORE the start of the course.
Please send your request for permission including grade list, CV and motivation letter to CentER Graduate School at firstname.lastname@example.org. Note that asking permission is not just a formality.
Quantitative Methods (CentER), Microeconomics 1 (CentER) and Microeconomics 2 (CentER)
The focus of the first part of the course
is on asymmetric information market equilibria.
In the presence of asymmetric information market equilibria often fail to be Pareto optimal. Adverse selection arises when an informed individual's decisions depend on his privately held information that adversely affects uninformed market participants. Informed individuals may find ways to signal information about their unobservable knowledge through observable actions or uniformed parties may screen informed individuals. In case an individual hires another to take some action for him as his agent informational problems arise in this principal-agent setting from hidden actions (moral hazard).
This course focuses on screening and moral hazard. (Signaling and equilibrium refinements are covered in the course RM Microeconomics 2). Topics which might be covered:
- Adverse selection
- 2-type model, efficiency rent extraction trade-off, non-responsiveness (Laffont-Martimort, chap 2)
- Type-dependent participation constraint, countervailing incentives, delegation, costly state-verification, repeated adverse selection (Laffont-Martimort, chap 3)
- Moral hazard
- Two-action model, tradeoff between insurance and efficiency (Laffont-Martimort, chap 4)
- Multi-tasking, nonseparability, application to financial contracts, collusion, mixed models (Laffont-Martimort, chap 5)
- More recent developments
- Incomplete contracts / theory of the firm / verifiability
- Relationship contracting
The focus of the second part of the course is on general equilibrium models. That is an equilibrium concept at which prices are such that aggregate demand equals aggregate supply plus total endowment. It is studied what the consequences are for the equilibrium in case there are externalities and public goods present in the economy. The existence of a general equilibrium is proved in detail. The fundamental theorems of welfare economics are treated which state that a competitive general equilibrium allocation is Pareto optimal and a social welfare optimum and that the reverse holds under convexity conditions.
Type of instructions
lectures + tutorials
Type of exams
Written final exam (80%) and regular graded homework assignments (20%).