Economics 603 Micro III

Economics 603 Micro III Axel Anderson Fall, 2014 Office: ICC 558 Office Hours: Wed: 9:30-11:30am E-Mail: aza@georgetown.edu and axel.z.anderson@gmail.com Game Theory Reference: Fudenberg, Drew and Jean Tirole (1995): Game Theory. The MIT Press, Cambridge, MA. Supplemental References: Mas-Colell and below by topic. For Later: Thomson, William (1999): The Young Person s Guide to Writing Economic Theory, Journal of Economic Literature, 37, 157 183. Thought Provoking: Rubinstein, Ariel (2006): Dilemmas of an Economic Theorist, Econometrica, 74(4), 865 883. Requirements/Assessments for this course. Micro I and II (Ec. 601 and 602) are prerequisites Problem sets will be handed out during the course of the semester, most likely one problem set per main topic in the outline on the following pages. There will be a midterm and a final based on material covered in the lectures and problems sets. Final grades will be determined according to the following weights: Final: 45% Midterm: 35% Problem Sets: 20% 1

Tentative Course Outline Within a given section, the articles are ordered (roughly) in the order I recommend reading them. In addition, the following codes are used. Background Reading: Often helpful to understanding the more technical articles. Core Reading Supplemental Reading: Usually a good place to start if you are particularly interested in a topic, or plan an applied project in an area. I reserve the right to add, subtract, demote or promote articles during the semester as needed. It is probably a good idea not to read anything more than 1-2 lectures ahead. 1 Bargaining 1.1 Foundations Zeuthen, F. (1930): Problems of Monopoly and Economic Warfare. Routledge and Sons, London. Nash, John. F., Jr. (1953): Two-Person Co-operative Games, Econometrica, 21, 128 140. Harsanyi, John C. (1956): Approaches to the Bargaining Problem Before and After the Theory of Games: A Critical Discussion of Zeuthen s, Hicks, and Nash s Theories, Econometrica, 24(2), 144 157. Nash, John. F., Jr. (1950) The Bargaining Problem, Econometrica, 18, 155 162. Kalai, Khud, and Meir Smorodinsky (1975): Other Solutions to Nash s Bargaining Problem, Econometrica, 43(3), 513 518. Rubinstein, Ariel, Zvi Safra, and William Thomson (1992): On the Interpretation of the Nash Bargaining Solution and Its Extension to Non-Expected Utility Preferences, Econometrica, 60(5), 1171 1186. Young, Peyton (1993): An Evolutionary Model of Bargaining, Journal of Economic Theory, 59(1), 145 168. 2

1.2 Complete Information Fudenberg, Drew, and Jean Tirole (1995): Game Theory. The MIT Press, Cambridge, MA, 113 116. Rubinstein, Ariel (1982): Perfect Equilibrium in a Bargaining Model, Econometrica, 50(1), 97 110. Binmore, Ken, Ariel Rubinstein, and Asher Wolinsky (1986): The Nash Bargaining Solution in Economic Modelling, The RAND Journal of Economics, 17(2), 176 188. Ochs, Jack, and Alvin E. Roth (1989): An Experimental Study of Sequential Bargaining, The American Economic Review, 79(3), 355 384. Smith, Lones, and Ennio Stacchetti (2002): Aspirational Bargaining, University of Michigan Mimeo. 1.3 Application: Search Shimer, Robert and Lones Smith (2000): Assortative Matching and Search, Econometrica, 68, 343-369. Mortenson, Dale (1982): Property Rights and Efficiency in Mating, Racing, and Related Games, American Economic Review, 72, 968 979. Rogerson, R, Shimer, and Wright (2004): Search-Theoretic Models of the Labor Market-A Survey, NBER Working Paper. Diamond, Peter (1982): Wage Determination and Efficiency in Search Equilibrium, The Review of Economic Studies, 49(2), 217 227. Pissarides, Christopher (1987): Search, Wage Bargains, and Cycles, The Review of Economic Studies, 54(3), 473 483. Personal Notes. Shimer, Robert (2005): The Cyclical Behavior of Unemployment and Vacancies, The American Economic Review, 95, 25 49. Hall, Robert, and Paul Milgrom (2008): The Limited Influence of Unemployment on the Wage Bargain, The American Economic Review, 98, 1653 1674. Hall, Robert (2005): Employment Fluctuations with Equilibrium Wage Stickiness, The American Economic Review, 95, 50 65. 3

1.4 Incomplete Information Fudenberg, Drew, and Jean Tirole (1995): Game Theory. The MIT Press, Cambridge, MA, Chapter 10. Rubinstein, Ariel (1985): A Bargaining Model with Incomplete Information About Time Preferences, Econometrica, 53(5), 1151 1172. Ausubel, Lawrence M., and Raymond J. Deneckere (1989): Reputation in Bargaining and Durable Goods Monopoly, Econometrica, 57(3), 511 531. Vincent, Daniel (1989): Bargaining with Common Values, Journal of Economic Theory, 48(1), 47 62. Watson, Joel (1998): Alternating-Offer Bargaining with Two-Sided Incomplete Information, Review of Economic Studies, 65(3), 573 594. Abreu, Dilip, and Faruk Gul (2000): Bargaining and Reputation, Econometrica, 68(1), 85 117. Ausubel, Lawrence M., and Raymond J. Deneckere (1992): Bargaining and the Right to Remain Silent, Econometrica, 60(3), 597 625. Cho, In-Koo (1990): Uncertainty and Delay in Bargaining, The Review of Economic Studies, 57(4), 575 595. Cramton, Peter C. (1992): Strategic Delay in Bargaining with Two-Sided Uncertainty, The Review of Economic Studies, 59(1), 205 225. Fudenberg, Drew, and Jean Tirole (1983): Sequential Bargaining with Incomplete Information, The Review of Economic Studies, 50(2), 221 247. 2 Monotone Methods 2.1 Supermodularity and Complementarity Amir, Rabah (2005): Supermodularity and Complementarity in Economics: An Elementary Survey, Southern Economic Journal, 71(3), 636 660. Topkis, Donald (1998): Supermodularity and Complementarity, Princeton University Press, Princeton, NJ., 1 91. Milgrom Paul and Chris Shannon (1994): Monotone Comparative Statics, Econometrica, 62(1), 157 80. 1 91. 4

Application: Matching Shapley L. and M. Shubik (1971): The Assignment Game I: The Core, International Journal of Game Theory, 1(1): 111 30. Becker G. (1973): A Theory of Marriage: Part I, Journal of Political Economy, 81(4): 813 46. Legros P. and A. Newman (2002): Monotone Matching in Perfect and Imperfect Worlds, The Review of Economic Studies, 69(4): 925 942. Gretsky N., J. Ostroy, and W. Zame (1992): The Nonatomic Assignment Model, Economic Theory, 2: 103 27. Anderson A. and L. Smith (2010): Dynamic Matching and Evolving Reputations, The Review of Economic Studies, 77(1): 3 29. Chiappori P., R. McCann, and L. Nesheim (2010): Hedonic price equilibria, stable matching, and optimal transport: equivalence, topology, and uniqueness, Economic Theory, 42(2): 317 354. Application: Supermodular Games Vives X. (1990): Nash Equilibria with Strategic Complementarities, Journal of Mathematical Economics, 19: 305 21. Milgrom P. and J. Roberts (1990): Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities, Econometrica, 58: 1255 78. Milgrom P. and J. Roberts (1994): Comparing Equilibria, American Economic Review, 84: 441 59. 2.2 More monotone methods Further readings forthcoming! 3 Mechanism Design 3.1 Principal-Agent Models Mas-Colell, Chapter 14. Holmström, B. (1979): Moral Hazard and Observability, Bell Journal of Economics, 10, 74 91. 5

Jewitt, I. (1988): Justifying the First Order Approach to Principal Agent Probelms, Econometrica, 56, 1177 1190. Mirrlees, J. (1999): The Theory of Moral Hazard and Unobservable Behavior: Part I, Review of Economic Studies, 66(1), 3 21. Hart O. and B. Holmström (1987) The Theory of Contracts, in Advances in Economic Theory, Fifth World Congress, Cambridge, Cambridge University. 3.2 Implementation Mas-Colell, Chapter 23. Fudenberg and Tirole, Chapter 7. Moore, John (1990): Implementation, Contracts, and Renegotiation in Environments with Complete Information, in Advances in Economic Theory, Sixth World Congress Vol. I, Cambridge, Cambridge University Press. Palfrey, Thomas (1990): Implementation in Bayesian Equilibrium: the Multiple Equilibrium Problem in Mechanism Design, in Advances in Economic Theory, Sixth World Congress Vol. I, Cambridge, Cambridge University Press. Roth, A. (2002): The Economist as Engineer: Game Theory, Experimentation, and Computation as Tools for Design Economics, Econometrica, 70(4), 1341 1378. McMillan, J. (1994): Selling Spectrum Rights, The Journal of Economic Perspectives, 8(3), 145 162. Groves, T. and J. Ledyard (1977): Optimal Allocation of Public Goods: A Solution to the Free Rider Problem, Econometrica, 45, 783 809. Dasgupta, Partha, Peter Hammond, and Eric Maskin (1979): The Implementation of Social Choice Rules: Some General Results on Incentive Compatibility, The Review of Economic Studies, 46(2), 185 216. Vickrey, W. (1961): Counterspeculation, Auctions, and Competitive Sealed Tenders, Journal of Finance, 16, 1 17. Gibbard, A. (1973): Manipulation of Voting Schemes: A General Result, Econometrica, 41, 587 602. Jehiel, P., B. Moldovanu, and E. Stacchetti (1996): How (Not) to Sell Nuclear Weapons, American Economic Review, 86(4), 814 829. 6

Satterthwaite, M. and S. Williams (1975): Strategy-Proofness and Arrow s Conditions: Existence and Correspondence Theorems for Voting Procedures and Social Welfare Functions, Journal of Economic Theory, 10, 187 217. Balinski, Michel and Tayfun Sonmez (1999): A Tale of Two Mechanisms: Student Placement, Journal of Economic Theory, 84(1), 73 94. 3.3 Optimal Trading Mechanisms Myerson, R. (1981): Optimal Auction Design, Mathematics of Operations Research, 6, 58 73. Myerson, R. and M. Satterthwaite (1983): Efficient Mechanisms for Bilateral Trading, Journal of Economic Theory, 29, 265-281. Satterthwaite, M. and S. Williams (1989): Bilateral Trade with the Sealed Bid Double Auction: Existence and Efficiency, Journal of Economic Theory, 48, 107 133. Myerson, Roger (1979): Incentive Compatibility and the Bargaining Problem, Econometrica, 47, 61 74. Holmström, Bengt and Roger Myerson (1983): Efficient and Durable Decision Rules with Incomplete Information, Econometrica, 51, 1799-1820. 4 Information and Learning Dixit, Avinash and Robert Pindyck (1994): Investment Under Uncertainty, Princeton University Press, Princeton, NJ., 59 144. Øksendal, B. (1998): Stochastic Differential Equations, Springer-Verlag. 4.1 The Value of, and Demand for, Information Hirshleifer, Jack and John G. Riley (1992): The Analytics of Uncertainty and Information, Cambridge, Cambridge University Press, Sections 5.1 5.2. Blackwell, David (1953): Equivalent Comparison of Experiments, Annals of Mathematics and Statistics, 24, 265 272. Radner, Roy and Joseph Stiglitz (1984): A Nonconcavity in the Value of Information, in Bayesian Models in Economic Theory, Elsevier Science Publishers, New York, Marcel Boyer and Richard Kihlstrom eds., 33 52. 7

Schlee, Edward and Hector Chade: Another Look at the Radner-Stiglitz Nonconcavity in the Value of Information, Journal of Economic Theory, forthcoming. Moscarini, Giuseppe and Lones Smith (2005): The Demand for Information: More Heat than Light, Working Paper, University of Michigan. Moscarini, Giuseppe and Lones Smith (2002): The Law of Large Demand for Information, Econometrica, 70(6), 2351 2366. Athey, Susan and Jonathan Levin (2000): The Value of Information in Monotone Decision Problems, MIT Working Paper. 4.2 Optimal Experimentation Easley, David, and Nicholas Kiefer (1988): Controlling a Stochastic Process with Unknown Parameter, Econometrica, 56, 1045 1064. Aghion, Phillipe, Patrick Bolton, Chris Harris, and Bruno Julien (1991): Optimal Learning by Experimentation, Review of Economic Studies, 58, 621 654. Bergemann, Dirk, and Juuso Valimaki (1996): Learning and Strategic Pricing, Econometrica, 64, 1125 1150. Bolton, Patrick and Chris Harris (1999): Strategic Experimentation, Econometrica, 67, 349 374. Moscarini, Giuseppe and Lones Smith (2001): The Optimal Level of Experimentation, Econometrica, 69, 1629 1644. 4.3 Sequential Social Learning Banerjee, Abhijit (1992): A Simple Model of Herd Behavior, Quarterly Journal of Economics, 107, 797 817. Bikhchandani, Sushil, David Hirshleifer, and Ivo Welch (1992): A Theory of Fads, Fashion, Custom and Cultural Change as Informational Cascades, Journal of Political Economy, 100, 992 1026. Smith, Lones and Peter Sørensen (2000): Pathological Outcomes of Observational Learning, Econometrica, 68, 370 398. Gale, Douglas (1996): What Have We Learned from Social Learning?, European Economic Review, 40, 617 628. Smith, Lones and Peter Sørensen (2001): Informational Herding and Optimal Experimentation, Review of Economic Studies, forthcoming. 8

4.4 Information Aggregation Feddersen, Timothy, and Wolfgang Pesendorfer (1997): Voting Behavior and Information Aggregation in Elections With Private Information, Econometrica, 65(5), 1029 1058. Young, Peyton (1988): Condorcet s Theory of Voting, The American Political Science Review, 82(4), 1231 1244. Ottaviani, Marco, and Peter Sorensen (2007): Aggregation of Information and Beliefs in Prediction Markets, Working Paper. Ottaviani, Marco, and Peter Sorensen (2001): Information Aggregation in Debate, Journal of Public Economics volume, 81(3), 393 421. 5 Stochastic Calculus in Economics Further readings forthcoming! 5.1 Mathematical Tools Oksendal, Bernt (1998): Stochastic Differential Equations, Springer. 5.2 Application: Repeated Games 5.3 Application: Dynamic Principal-Agent 5.4 Application: Dynamic Learning 6 Repeated Games 6.1 Perfect Monitoring Fudenberg, Drew and Jean Tirole (1995): Game Theory. The MIT Press, Cambridge, MA, 145 168. Stacchetti, Ennio (1996): Infinitely Repeated Games, University of Michigan Notes. Rubinstein, Ariel (1990): Comments on the Interpretation of Repeated Games Theory, in Advances in Economic Theory, Sixth World Congress, Cambridge, Cambridge University Press. Abreu, Dilip (1988): On the Theory of Infinitely Repeated Games with Discounting, Econometrica, 56: 383 398. 9

Fudenberg, Drew and Eric Maskin (1986): The Folk Theorem in Repeated Games with Discounting or with Incomplete Information, Econometrica, 54: 533 556. Benoit, Jean-Pierre and Vijay Krishna (1985): Finitely Repeated Games, Econometrica 53(4): 905 922. Abreu Dilip, David Pearce, and Ennio Stacchetti (1993): Renegotiation and Symmetry in Repeated Games, Journal of Economic Theory, 60(2), 217 40. Chade, Hector, Pavlo Prokopovych, and Lones Smith (2004): Repeated Games with Present-Biased Preferences, Working Paper, University of Michigan. Maskin, Eric and Jean Tirole (1988): A Theory of Dynamic Oligopoly I: Overview and Quantity Competition with Large Fixed Costs, Econometrica, 56, 549 570. Maskin, Eric and Jean Tirole (1987): A Theory of Dynamic Oligopoly III: Cournot Competition, European Economic Review, 31, 947 968. Bernheim, B.D. and M. Whinston (1990): Multimarket Contact and Collusive Behavior, Rand Journal of Economics, 21, 1-26. Farrell, J. and Eric Maskin (1989): Renegotiation in Repeated Games, Games and Economic Behavior, 1: 327 360. 6.2 Public Monitoring Green, Edward and R. Porter (1984): Noncooperative Collusion under Imperfect Price Information, Econometrica, 52, 87 100. Fudenberg, Drew, and Jean Tirole (1995): Game Theory. The MIT Press, Cambridge, MA, 182 197. Abreu Dilip, David Pearce, and Ennio Stacchetti (1990): Toward a Theory of Discounted Repeated Games with Imperfect Monitoring, Econometrica, 58, 1041 1063. Abreu Dilip, David Pearce, and Ennio Stacchetti (1986): Optimal Cartel Equilibria with Imperfect Monitoring, Journal of Economic Theory, 39, 251 269. Phelan, Christopher and Ennio Stacchetti (2001): Sequential Equilibria in a Ramsey Tax Model, Econometrica, 69(6), 1491 1518. Fudenberg, Drew, David Levine, and Eric Maskin (1994): The Folk Theorem with Imperfect Public Information, Econometrica, 62, 997 1039. 10

6.3 Private Monitoring Sannikov, Yuliy (2007): Games with Imperfectly Observable Actions in Continuous Time, Econometrica, forthcoming. Kandori, Michihiro (2002): Introduction to Repeated Games with Private Monitoring, Journal of Economic Theory, 102(1), 1 15. Mailath, George J. and Stephen Morris (2002): Repeated Games with Almost-Public Monitoring, Journal of Economic Theory, 102(1), 189 228. Ely, J. and J. Valimaki (2000): A Robust Folk Theorem for the Prisoner s Dilemma, Journal of Economic Theory, 102(1), 84 105. Kandori, M. and H. Matsushima (1998): Private Observation, Communication, and Collusion, Econometrica, 66, 627 652. Compte, O. (1998): Communication in Repeated Prisoner s Dilemma with Private Monitoring, Econometrica, 66, 597-626. Kandori, M. (1992): Social Norms and Community Enforcement, Review of Economic Studies, 59: 63 80. Ellison, G. (1994): Cooperation in the Prisoner s Dillemma with Anonymous Random Matching, Review of Economic Studies, 61: 567 588. Anderson, A. and Lones Smith (2012): Dynamic Deception, working paper. 11