Classes: TTh 1:00-2:30, E51-372
Recitals: Fri 1:00 - 2:30, E52-395
Instructor: Bengt Holmstrom, ext. 3-0506
Office and hours: E52-271d, by appointment
Adm. Assistant: Deborah Garrity, E52-274, ext. 2-1618
Teaching Assistant: Matilde Bombardini, matildeb@MIT.EDU

About the class:

The topic of the class is information economics. The purpose is to give an introduction to some of the main subjects in this field: risk sharing, moral hazard, adverse selection (signaling, screening), mechanism design, decision making under uncertainty. These subjects (and others) will be treated in more depth in the advanced theory courses on Contract Theory.

There will be a final exam that is closed book. The exam is scheduled to take place in the last week of class.

A waiver exam is administered on February 7th, 1:00 to 2:30 p.m., E52-398.

There will be 4-5 homework sets, which are marked but do not directly count in the grade. As an empirical statement, note that YOU HAVE TO DO THE HOMEWORK TO DO WELL.

I will follow the textbook by MasColel, Whinston and Green. It strikes the right balance between the dry text of Varian and the verbose text of Kreps. If you prefer to read these other books you are welcome to do so, but do note that some of the material I will cover is poorly covered by these texts. There is a limited quantity of MWG at the COOP; noted chapters have been copied into a Part B course reader on sale at Copy Tech in E52.

I have included in the reading list a few articles, either because they are classic, or because my lectures will make use of them. Most of the articles are available online at JSTOR, and are linked from the course webpage: http://web.mit.edu/14.124/www/, the rest are available in a packet available in Copy Tech in the Basement of E52.

Readings

0. Books.

MasColel A., M. Whinston, J. Green, Microeconomic Theory, Oxford University Press, 1995.

Kreps D., A Course in Microeconomic Theory, Princeton University Press, 1990.

Varian H., Microeconomic Analysis, Third Edition, W.W. Norton Company, 1992.

1. Choice under uncertainty (4 classes)

MWG, Ch 6 C-D, 183-199.

Kreps, Ch 3.2-3, 81-98.

Varian, Ch 11.5-7, 177-190.

Holmstrom, B. "Lecture Note: Decision Making Under Uncertainty - Experiments and Value of Information". Will be available here soon.

Rothschild, M. and J. Stiglitz, "Increasing Risk I: A Definition," Journal of Economic Theory, 2, 1970.

Wilson, R. "The Theory of Syndicates," Econometrica, 36 (1), 1968, pp. 119-132.

Rabin, M. (2000), "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, 68 (5), 1281-92.

Recommended: Hirshleifer, J and J Riley. The Analytics of Uncertainty and Information. Cambridge University Press, 1992, Chapter 5.

2. Moral hazard (2 classes)

MWG, Ch 14

Kreps, Ch 16

Varian, Ch 25.4

Hart, O. and B. Holmstrom, "The Theory of Contracts," in T. Bewley (ed), Advances in Economic Theory -- Fifth World Congress, Cambridge University Press, 1987.

3. Adverse selection; signaling (2 classes)

MWG, Ch 13 A-C, 436-459.

Kreps, Ch 17.1-3, 625-650.

Varian, Ch 25.9-11, 468-471.

Akerlof, G. "The Market for Lemons: Qualitative Uncertainty and the Market Mechanism," Quarterly Journal of Economics, 84 (3), 1970, pp. 488-500.

4. Adverse selection; screening (2 classes)

MWG, Ch 13 D, 460-467.

Kreps, Ch 17.2, 629-645.

Varian, Ch 25.6-9, 457-469.

Rothschild M. and J. Stiglitz, "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," Quarterly Journal of Economics, 90 (4), 1976, pp. 629-649.

5. Mechanism design (2 classes)

MWG, Ch 23 A-D, 857-891.

Kreps, Ch 18, 661-713.

Varian, Ch 23, 414-431.