MICROECONOMICS 2

This is a core course that completes the advanced study of economics within the QEM Master by providing knowledge and competences to deal with complex issues in microeconomics. It has two parts: the first part provides a graduate-level introduction to formal strategic reasoning. The ability to represent and reason about strategic interaction is a fundamental component for the analysis and study of behaviour in situations of competition or cooperation. The second part introduces the analysis of various situations, both in transactions in markets and in contracting, where parties asymmetrically informed, explaining the value of information in economics.


This course provides both an introduction to game theory, viewed as the scientific language to deal with strategic interaction and a representation of the theory of insurance, the theory of agency, the problems of adverse selection and moral hazard. Differently from a university-wide policy that equates 1 ECTS with 3.75 actual hours of frontal instruction, this 7-ECTS course equates 1 ECTS with 6.43 actual hours of frontal instruction.

a) Knowledge and understanding:
a.1) Ability to build formal models of strategic interactions.
a.2) Ability to discern (iteratively) dominated strategies.
a.3) Ability to conceptualise randomisation in strategic play.
a.4) Ability to build formal models of choices under uncertainty
a.5) Ability to conceptualise the role of information in economics


b) Applying knowledge and understanding:
b.1) Ability to compute different kinds of equilibria.
b.2) Ability to build formal models for strategic interactions.
b.3) Ability to handle randomisation in strategic play.
b.4) Ability to compute optimal solutions under uncertainty.
b.5) Ability to build formal models of equilibrium under different market structures.

c) Making judgements
c.1) Ability to detect and discuss trade-offs in strategic choices.
c.2) Ability to rank the plausibility of different predictions about strategic interactions.
c.3) Ability to detect and discuss trade-offs in the context of risk and the context of markets affected by asymmetric information.


d) Lifelong learning skills
d.1) Ability to reframe issues in terms of the opponents' viewpoint.
d.2) Ability to elaborate issues in terms different starting assumptions.
d.3) Ability to make use of new tools and adapt competences.

Part B:
The course provides a graduate-level introduction to noncooperative game theory. It also covers standard applications such as Cournot and Bertrand competition, auctions, and others. Given the limited length (5 weeks), students should work intensively and prior to the class should read the material on the reference book provided.

This course places the emphasis both on the formal representation of economic issues and on applications of the theory. There are no formal prerequisites, but successful completion of standard undergraduate course in microeconomics, optimisation and probability is highly recommended.

Part B: No previous formal knowledge of game theory is required. However, students are expected to be familiar with standard material in analysis and probability. They may refer to the mathematical appendix in Jehle and Reny (2011), or Mas-Colell, Whinston and Green (1995). See below.

Part A (Game Theory).
The course covers selected topics from this list: Strategic dominance, Nash equilibrium, Mixed strategies, Backward induction, Alternating-offer bargaining, Subgame perfect equilibrium Repeated games, Incomplete information, Auctions and Revenue equivalence, Perfect bayesian equilibrium, Equilibrium selection.

Part B
- The role of information in economics
- Market economy with contingent commodity: Arrow-Debreu equilibrium
- Sequential Trade
- Complete and incomplete asset market
- The role of insurance and risk sharing.
- State-space representation.
- Asymmetric information and incentives.
- Adverse selection. The market of lemons.
- Optimal contracts, signaling and screening, adverse selection in insurance markets.
- Moral hazard. The standard principal-agent problem, moral hazard and insurance.

Part A:
The course follows fairly closely material that you can find in T. Fujiwara-Greve (2015), Non-cooperative Game Theory, Springer. For the part on auction theory you can refer to Krishna (2002), Auction Theory, 2nd edition. You can find useful mathematical appendixes in Jehle and P. Reny (2011), Advanced Microeconomic Theory, 3rd edition, and Mas-Colell, Whinston and Green (1995), Microeconomic theory.

Part B:
Mas-Colell, Whinston and Green (1995), Microeconomic theory. Jehle and P. Reny (2011), Advanced Microeconomic Theory, 3rd edition

Grading is based on a final 90 minutes written exam. The exam will test both general comprehension of the theory via theoretical questions, as well as the ability to solve practical problems. Doctoral students may be asked a dedicated question or problem aimed at testing more advanced material.

The exam is closed-notes and closed-book, but you are allowed to use a pocket calculator and two sides of an A4-sheet prepared by you at home. Failing to register for the exam is sufficient cause for denying admission.

Lectures and practice sessions.

There will be fifteen lectures in each of the two parts. During some of the lectures we will practice together how to solve some exercises.
QEM vs Doctoral students. The course is attended by QEM students and first-year doctoral students. Lectures are common to both groups. Doctoral students may be required to study on their own more advanced material on selected topics.

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