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 are asymmetrically informed, thus 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.

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 A (Game Theory).
The first part of this course presents a general introduction to game theory. Students are introduced with some of the most important solution concepts, and results of game theory, as well as the methodological principles that have guided the development of the theory. This course is organized around the following models (i.e., game representations): Games in normal form, games in extensive form, and games with incomplete information. The course covers a selected list of solution concepts: Strategic dominance, Nash equilibrium, subgame perfect Nash equilibrium, Bayesian equilibrium, and (weak) perfect Bayesian equilibrium.

Part B (Information Economics)
The second part of the course will cover some selected topics on economics of information. The core part will be based on Mas-Colell, A., M. Whinston and J. Green (1995) ch. 13 and 14.
Of ch.13, we cover adverse selection, signaling, and competitive screening. With ch. 14, we introduce the principal agent’s model with hidden actions (moral hazard) and hidden characteristics (monopolistic screening). We will expand on this latter part following the second chapter on adverse selection in Salanie (2005). We may also review the same topics in the book by Jehle and Reny (2010), who use an insurance market application.

Depending on time, we may cover additional topics, such as an introduction to auction theory (based on ch. 2,3 of Krishna (2010)), and/or the Crawford and Sobel (1982)’s cheap talk model.

Part A:
The basic references for Part A are:
- Analysis of Conflict by Roger B. Myerson (1991), Harvard University Press.
- Microeconomic Theory by Mas-Colell, Whinston and Green (1995), Oxford University Press.
- Game Theory by Michael Maschler, Eilon Solan, and Shmuel Zamir (2013), Cambridge University Press.

Part A does not strictly adhere to any one of these three textbooks; instead, it blends presentation elements from all of them. However, for students interested in purchasing a book to supplement their preparation for lectures, "Game Theory" by Eilon et al (2013) offers a compelling blend of rigor and illustrations.

Part B:
Geoffrey Jehle, and Phil Reny (2010), Advanced Microeconomic Theory, Prentice Hall.
Krishna, Vijay (2010), Auction Theory, Academic Press. Second Edition.
Mas-Colell, A., M. Whinston and J. Green (1995), Microeconomic Theory, Oxford University Press (henceforth, MWG).
Salanie, Bernard (2005), The Economics of Contracts: A Primer, 2nd Edition, MIT Press

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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