Economics 30300a. Price Theory IIIa.

Course description

Spring 2018: In the first five weeks of the quarter, this course will focus on the theory of games and markets where individuals face risks and have different information. We may begin with topics on Bayesian games (if not covered in Price Theory IIb), and then review some basic ideas about risk aversion and risk sharing with common information. We will then study basic models for understanding how transactions in organizations and markets can be affected by problems of moral hazard and adverse selection. Then the second half of the course will be taught by Philip Reny.
Groups of up to six students who have met to do a homework assignment together can hand in the assignment as a group. Grades will be based mainly on the final exam.

Main Texts:

Plan of Topics:

  1. Bayesian games with incomplete information: MWG 8E; JR 7.2.3; My 2.8-2.9, 3.9-3.11; gt notes pp 9-16.
  2. Risk aversion and risk sharing with common information: JR 2.4.3; MWG 6.C-D; notes pp1-4.
  3. Principal-agent problems with moral hazard: JR 8.2; MWG 14.B; notes pp 5-11.
  4. Principal-agent problems with adverse selection: MWG 14.C,23.D-F; JR 9; notes pp 12-17.
  5. Equilibria in markets and bargaining games with asymmetric information: JR 8; MWG 13.A-D notes pp 18-24.

References: [by topic]

R. Myerson, "Harsanyi's games with incomplete information," Management Science 50(12):1818-1824 (2004).

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B Holmstrom, R Myerson, "Efficient and durable decision rules with incomplete information," Econometrica 51:1799-1819.

M Spence, "Job market signaling," Quarterly J of Economics 87:355-374 (1973).
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I Cho, D Kreps, "Signaling games and stable equilibria," Quarterly J Economics 102:179-221 (1987).
C Wilson, "A model of insurance markets with incomplete information," J Economic Theory 16:167-207 (1977).
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P Dasgupta, E Maskin, "Existence of equilibrium in discontinuous economic games," Review of Economic Studies 46:1-41 (1986).
M Hellwig, "Some recent developments in the theory of markets with adverse selection," European Economic Review 31:319-325 (1987).
R Myerson, "Sustainable matching plans with adverse selection," Games and Economic Behavior 9:35-65 (1995).
E Azevedo, D Gottlieb, "Perfect competition in markets with adverse selection," Econometrica 85(1):67-105 (2017).
V Crawford, J Sobel, "Strategic information transmission," Econometrica 50:579-594 (1982).