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Market Design and the Economics of Asymmetric Information

  • Enseignant(s):   L.Santos Pinto   R.Hakimov  
  • Titre en français: Conception du Marché et Aspects Économiques de l'Information Asymétrique
  • Cours donné en: anglais
  • Crédits ECTS: 6 crédits
  • Horaire: Semestre de printemps 2018-2019, 4.0h. de cours (moyenne hebdomadaire)
  •  séances
  • Formations concernées:
    Baccalauréat universitaire ès Sciences en économie politique

    Baccalauréat universitaire en sciences économiques

 

Objectifs

Santos-Pinto

The goal of this part of the course is to introduce students to the economics of asymmetric information. At the end of this part of the course students should know that informational asymmetries can lead to market failures and that there exist decentralized solutions (e.g., signaling and screening) and centralized solutions (e.g., mandatory insurance) that can reduce or prevent these market failures. Students should also know that informational asymmetries can cause welfare losses in contractual relationships not mediated by a market and that contract theory shows us how to reduce or prevent these welfare losses.

Hakimov

The class aims to introduce students to one of the most applied areas of microeconomics - market design. This class is about how to design mechanisms to allocate scarce resources and how to create successful marketplaces and platforms.

Contenus

Santos-Pinto

1. Introduction

1.1 The Economics of Asymmetric Information

1.2 Hidden Information (or Private Information)

1.3 Two Kinds of Hidden Information: Hidden Characteristics and Hidden Actions

1.4 Two Kinds of Problems Caused by Asymmetric Information: Adverse Selection and Moral Hazard

2. Review of Basic Game Theory Concepts

2.1 Nash Equilibrium

2.2 Backward Induction

2.3 Subgame Perfect Nash Equilibrium (SPNE)

2.4 Perfect/Imperfect vs Complete/Incomplete Information

3. Perfect Bayesian Equilibrium (PBE)

3.1 PBE in Dynamic Games of Complete Information

3.2 PBE in Dynamic Games of Incomplete Information

3.3 The Notion of Type and Strategy

3.4 Bayesian Updating

3.5 Separating Equilibrium

3.6 Pooling Equilibrium

3.7 The One-Shot-Deviation Principle

4. Hidden Characteristics and Adverse Selection

4.1 Hidden Characteristics: Definition and Examples

4.2 What is Adverse Selection?

4.3 Example 1: Adverse Selection in the Used Car Market

4.4 Akerlof's (1970) "Market for Lemons"

4.5 Example 2: Adverse Selection in Insurance Markets

4.6 How do Insurance Firms Protect themselves against Adverse Selection?

5. Decentralized Solutions to the Adverse Selection Problem: Signaling

5.1 Spence's (1973) "Job Market Signaling"

5.2 Leland and Pyle's (1977) "Equity Signaling"

6. Decentralized Solutions to the Adverse Selection Problem: Screening

6.1 Rostchild and Stiglitz's (1976) "Screening in Insurance Markets"

7. Centralized Solutions to the Adverse Selection Problem: Mandatory Insurance

8. Hidden Actions and Moral Hazard

8.1 Hidden Actions: Definition and Examples

8.2 What is Moral Hazard?

8.3 Example 1: Moral Hazard in Insurance Markets

8.4 How do Insurance Companies Protect themselves against Moral Hazard?

8.5 Example 2: Moral Hazard in Principal-Agent Relationships

9. Solutions to the Moral Hazard Problem in Principal-Agent Relationships

9.1 The Principal-Agent Model

9.2 Bonuses and Other Forms of Incentives, Monitoring, and Auditing

9.3 Definition of contract, participation constraint, and incentive constraints

9.4 Holmström’s (1979) “Moral Hazard and Observability”

9.5 The “Informativeness Principle”

9.6 Grossman and Hart’s (1983) “Principal-Agent Problem”

9 .7 Holmström and Milgrom (1987)

Hakimov

The course outline is preliminary and subject to changes.

1. Introduction to market design. Marriage problem, Deferred acceptance and its applications

1.1. What is market design and its connection to game theory

1.2. Matching markets

1.3. Marriage problem

1.4. Concept of stability

1.5. Deferred acceptance mechanism

1.6. National residence match program

1.7. Unraveling

2. House allocation problem and kidney exchange

2.1. House allocation problem

2.2. Serial dictatorship

2.3. Existing tenants and incentives for participation

2.4. Top trading cycles mechanism

2.5. MIT- mechanism

2.6. Kidney exchange

3. School choice and university admissions

3.1. School choice problem

3.2. Boston mechanism

3.3. Deferred acceptance and Top trading cycles for school choice

3.4. Constrained lists

3.5. Tie-breaking of priorities

3.6. University admissions

3.7. Empirical evidence

4. Simple auctions

4.1. First-price sealed bid auction

4.2. Second-price sealed bid auction

4.3. Dutch auction

4.4. English auction

4.5. Revenue equivalence theorem

4.6. Empirical evidence of strategies

4.7. Reservation prices and other practicalities

5. Other auctions

5.1. Common value auctions

5.2. Winners curse

5.3. All-pay auction (contest)

5.4. Multiple-unit auctions

5.5. Online ads auctions

6. High frequency trading, black markets

6.1. High frequency trading

6.2. Arbitrage trading

6.3. Frequent batch auctions

6.4. First-come-first-serve online allocation systems

6.5. Deferred allocation system

7. Overview and exam preparation

Références

Santos-Pinto

Textbooks:

1. The Economics of Asymmetric Information by Brian Hillier

2. The Economics of Contracts: A Primer by Bernard Salanié

3. The Theory of Incentives: The Principal-Agent Model, by Laffont and Martimort.

Hakimov

Textbooks:

1. Two-Sided Matching: A Study in Game Theoretic Modeling and Analysis by Alvin Roth and Marilda Sotomayor published by Econometric Society. The textbook is optional and supplemental to the slides covered in class.

2. Market Design by Guillaume Haeringer. The textbook is optional and supplemental to the slides covered in class.

Pré-requis

Microeconomic Theory (Analyse économique: Microéconomie)

Evaluation

1ère tentative

Examen:
Sans examen (cf. modalités)  
Evaluation:

Santos-Pinto

Your grade in this part of the course will be determined on the basis of active participation during lectures (20%) and a midterm (80%) that will take place in the 7th week of the semester (please make sure that you are present during this week). The midterm is written and closed-book. The midterm lasts between 2 and 3 hours.

Hakimov

The grade of the course is 20% participation during the lectures and 80% midterm, which will take place on the last lecture and will last for 3 hours. The midterm will consist of six questions (not necessarily with the same weight in terms of points), one for the topic of each week. Students are expected to be able to solve the allocation task, know the properties of the different allocation mechanisms, and also be aware of the main theoretical and empirical results on each of the topics. Students are expected to know the proofs of the main results if given in the class.

Final Grade

Your final grade at the course is 50% of your grade in Santos-Pinto and 50% of your grade in Hakimov.

Rattrapage

Examen:
Ecrit 3 heures
Documentation:
Non autorisée
Calculatrice:
Non autorisée
Evaluation:

If you fail the course you will have to take a final exam. The final exam is written and closed-book. The duration of the final exam is 3 hours. In case of a retake, the retake exam determines 100% of your final grade.



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