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Microeconomics 3 (ECO-CO-MICRO3)

ECO-CO-MICRO3

Purpose

Course Description
This course is the third part of the Microeconomics theory course for PhD. It is intended to introduce you to the Economics of Information, Social Choice Theory and Mechanism Design. The information economics part of the class will focus on the preliminaries of the fundamental models of asymmetric information between agents, a central and essential part of modern economic theory. This setup covers a vast number of important economic situations. We will begin by studying adverse selection, where one of the two parties in a contractual setting is unaware of the types/quality of the other party. We will analyse the equilibrium and efficiency implications of such a setting. We will then explore options for mitigating information asymmetry by looking at signalling, screening, and communication games. We will then move to Moral Hazard, a situation where one party can not fully observe the actions or intensity of the actions of the other party. We will then move to the question of how to aggregate the choices and preferences of individuals in a society
and which aggregation mechanisms are efficient. Furthermore, we will look at mechanism Design, exploring how to design incentive-compatible mechanisms for agents to reveal their types or undertake the designer’s optimal actions in a world of incomplete information. We then touch the topic of auctions and using the tools we gained in the mechanism design part we try to pin down the conditions to design an optimal selling mechanism in a world with information asymmetry.
 

Description

>Course Material
By and large, the course will be based on slides/lecture notes, which I will make available online.
The notes are mostly based on the textbooks below. These notes will be available at the start of each topic, while slides will be uploaded per session.

The course will most closely resemble J. R. (2011). Advanced Microeconomic Theory and Mas-
Colell, A., Whinston, M. D., & Green, Microeconomic Theory. I strongly recommend you get ahold
of them because I will give you homework exercises or exam questions from these textbooks. We
may occasionally use Bolton and Dewatripont’s (2005) Contract Theory. This book will help you
better understand the incentive compatibility concept and the design of optimal contracts for most
of the course. For those interested in theoretical analysis in economics, this book will help your
economics career, too. For people who are particularly interested in the material for the last section
of the course (Mechanism Design and Auctions), I would also recommend Krishna (2010), Auction
Theory and Ok, E. (2004) Real Analysis with Economic Applications.

Textbooks
The course has two principal textbooks and two recommended textbooks. For some topics not covered in the textbooks, there are papers as recommended readings. Each topic has Extra readings, which are articles that are particularly closely related to some of the material from class or books that are particularly useful for the topic. These extra materials are for those interested in a future in economic theory or may help you with the theoretical part of the summer report. The extra readings are optional; in general, you will not be tested on material not covered in class.

Principal Textbook:
• Jehle and Reny (2011): Advanced Microeconomic Theory. 3rd Edition, London: Pearson
• Mas-Colell, Whinston and Green (1995): Microeconomic Theory. Oxford, Oxford University Press

Recommended Textbook:
• Bolton and Dewatripont (2005): Contract Theory. Cambridge, Massachusetts, The MIT Press
• Krishna (2010) : Auction Theory. Elsevier

Assessment
Assessment of the course will consist of two elements:
Homework 20%
Final Exam 80%

Homework
There will be six problem sets. You are encouraged to work with your classmates to solve them, but I request each of you to write up and take your answers to the TA sessions. Solutions to the problems will be posted on the course website. You should submit all of your problem sets to your TAs. At the end of the term, I will randomly choose two out of six problem sets, and only those will be graded toward your final mark. You can solve, and hand in your problem sets in groups not exceeding 3, and I will recommend group work in general. Though not all problem sets will be graded, mastering them will help you do well in the final exam. Solutions will be provided for all questions in all problem sets.
 
Final Exam
There will be one final exam, which will take place on the date determined by the department. It will cover all the material covered in the class, TA sessions and the book chapters assigned to each topic. You are not permitted to use any outside materials or resources. The Exam will consist of proofs covered in the course materials (or very close proofs using the same logic) or variations of the type of questions in the problem sets.

Office Hours
You can always contact me to schedule a meeting through email. I will be happy to help both on the material discussed in the class, going through proofs etc. It is alright if you want to come in roups.


Topics:
Information & Bayesian Games:
• Introduction to Bayesian games and Bayesian Equilibrium
– JR 7.3
– MWG 13-A
• Adverse Selection, Signaling and Screening
– JR 8.1
– MWG 13-BCD
– Akerlof, George A. “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism.”
The Quarterly Journal of Economics 84, no. 3 (1970): 488–500
• Moral Hazard
– JR 8.2
– MWG 14-ABC
• Information Cascades
– Banerjee. Abhijit V. "A Simple Model of Herd Behavior", The Quarterly Journal of Economics,
107(3), (1992): 797-817
• Cheap Talk
– Crawford, V. P.; Sobel, J. (1982). "Strategic Information Transmission". Econometrica.
50 (6): 1431–1451. (Especially the Example on pages 1440-1444)
Extra Readings:
1. Cho, In-Koo, and David M. Kreps. “Signaling Games and Stable Equilibria.” The Quarterly
Journal of Economics, 102(2), (1987): 179–221.
2. Paul Milgrom and John Roberts, 1982. "Limit Pricing and Entry under Incomplete Information:
An Equilibrium Analysis," Econometrica, 50(2). pp. 443-459.
3. Grossman, Sanford J., and Oliver D. Hart. "An Analysis of the Principal-Agent Problem."
Econometrica 51(1), (1983): 7-45.
4. Harsanyi, J. “Games with Incomplete Information Played by Bayesian Players,” Parts I-III,
Management Science, 14,(1967-68): 159-182, 320-334, 486-502.
5. Hölmstrom, Bengt. "Moral Hazard and Observability." The Bell Journal of Economics 10(1),
1979: 74-91.
Social Choice:
• Introduction to Social Choice
– JR 6.1-6.2
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– MWG 21-AB
• Arrow’s Impossibility Theorem
– JR 6.5
– MWG 21-CDE
– * Dasgupta, P.and E. Maskin, "On the Robustness of Majority Rule," Journal of the European
Economic Association, 6(5) (2008): 949--973.
Extra Readings:
1. Arrow, K. (1963): Social Choice and Individual Values. New Haven: Yale University Press
2. Gibbard, A. “Manipulation of Voting Schemes,” Econometrica 41, (1973): 587-601
3. Reny, P. J. “Arrow’s Theorem and the Gibbard-Satterthwaite Theorem: A Unified Approach,”
Economics Letters, 70(1), (2001): 99-105.
Mechanism Design:
• Introduction to Mechanism Design
– JR 9.4
– MWG 23-AB
• D.S Implementation
– JR 9.4-9.5
– MWG 23-C
• The Monopolist’s Problem
• Revenue Equivalence
– JR 9.2-9.3
– MWG 23-DEF
Extra Readings:
1. Krishna, V. and M. Perry: “Efficient Mechanism Design,” mimeo,2000 Penn State University,
https://drive.google.com/file/d/0B9qyCPfbmExnbmE1OTk5OGJmQzA/view.
2. Milgrom, P.and I. Segal, "Clock Auctions and Radio Spectrum Reallocation", Journal of Political
Economy, 128(1), (2020): 1-31.
3. Milgrom, Paul and R. Weber: "A Theory of Auctions and Competitive Bidding," Econometrica,
50, (1982): 1089-1122.
4. Myerson, R.: “Optimal Auction Design,” Mathematics of Operation Research, 6, (1981): 58-
73
5. Perry, Motty and Philip J. Reny, "A General Solution to King Solomon’s Dilemma," Games and
Economic Behavior, 26(2), (1999): 279-285
* If time permits.
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