Economics 30300b. Price Theory IIIb.

Course description

In the second half of the quarter, this course will focus on the effects of informational asymmetries in markets. We will consider models of adverse selection and its effect on market outcomes. We will study various ways that markets may respond to mitigate the negative effects of adverse selection. Two of these responses, signaling and screening, will be considered in detail, with applications to insurance markets. We will also introduce other topics from contract theory, including principal-agent problems with moral hazard.
Spring 2011. Instructor: Roger Myerson. Office hours: Wednesdays 1:00-3:45pm, Thursdays 3:00-4:45pm, in Ro 201b.
Groups of up to five students who have met to do a homework assignment together can hand in the assignment as a group.

Main Texts:

Plan of Topics:

  1. Risk aversion and risk sharing with common information: JR 110-118; MWG 6.C-D; notes pp1-4.
  2. Principal-agent problems with moral hazard: JR pp 413-420; MWG 14.B; notes pp 5-11.
  3. Principal-agent problems with adverse selection: MWG 14.C,23.D-F; JR pp 427-484; notes pp 12-17.
  4. Equilibria in markets and bargaining games with asymmetric information: JR pp 380-413; MWG 13.A-D notes pp 18-24.

References: [by topic]

R Wilson, "The theory of syndicates," Econometrica 36(1):119-132 (1968).
K Borch, "Equilibrium in a reinsurance market," Econometrica 30(3):424-444 (1962).
R Coase, "The problem of social cost," J of Law and Economics 1:1-44 (1960).

G Becker, G Stigler, "Law enforcement, malfeasance, and compensation of enforcers," J Legal Studies 3:1-18 (1974).
M Jensen, W Meckling, "Theory of the firm: managerial behavior, agency costs, and ownership structures," J Financial Economics 3:305-360 (1976).
C Shapiro, J Stiglitz, "Equilibrium unemployment as a worker discipline device," American Economic Review 74(3):433-444 (1986).
B Holmstrom, P Milgrom "Aggregation and linearity in the provision of intertemporal incentives," Econometrica 55:303-328 (1987).

G Akerlof, "The market for lemons," Quarterly J Economics 84:488-500 (1970).
R. Myerson, "Optimal auction design," Mathematics of Operations Research 6:58-73 (1981).
R Myerson, M Satterthwaite, "Efficient mechanisms for bilateral trading," J Economic Theory 28:265-281 (1983).
P Cramton, R Gibbons, P Klemperer, "Dissolving a partnership efficiently," Econometrica 55:615-632 (1987).
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).
M Rothschild, J Stiglitz, "Equilibrium in competitive insurance markets," Quarterly J Economics 90:629-649 (1976).
J Stiglitz, A Weiss, "Credit rationing in markets with imperfect information," American Economic Review 71:393-410 (1981).
S Myers, N Majluf, "Corporate financing and investment decisions when firms have information that investors do not have," J Financial Economics 13:187-221 (1984).
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).
J Riley, "Informational equilibrium," Econometrica 47:331-359 (1979).
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).
V Crawford, J Sobel, "Strategic information transmission," Econometrica 50:579-594 (1982).