Spring 2014

9:00-10:20 T TH, Room A002, 77 Prospect Street

**Part 2**: Games of Incomplete Information and Information Economics

Dirk Bergemann

30 Hillhouse Avenue, #24

432-3592 Email

Office hours: W 1 – 2.30 pm

Tibor Heumann

30 Hillhouse Avenue #31

Office hours 4:15-5:15 Monday, 28 Hillhouse, B8

Section 5:30-6:30 Monday, 28 Hillhouse, B8

**Topic: **This is the second part in the two course sequence in Microeconomic Theory. The second part of this course provides an introduction to information economics and games of incomplete information.

Game theory is the analysis of strategic interaction among individual agents. Game theory seeks to provide models of conflict and cooperation that are relevant in a large class of situations basic to almost all social sciences. It offers insight into economic, political or social situations in which individuals have different goals and preferences. The basic assumptions of game theory are that decision-makers pursue well-defined objectives (they are *rational*) and take into account their knowledge or expectations of other decision-makers’ behavior (they are *strategic*).

The first half of this course introduced basic notions such as action, strategy and equilibrium for complete information environments. The second half extends the theory to cover situations where different agents have different information. This allows game theory to address situations where in which agents have private information that is not readily accessible to all other agents. The resulting asymmetry in information is pervasive in economic relationships: Customers know more about their tastes than firms, firms know more about their own costs than their competitors. As private information changes the nature of the economic relationships, new tools are required to analyze exchange and contracting environments. The basic adverse selection model is introduced first as the relationship between an informed and an uninformed agent. The general theory of mechanism design analyzes the problem of how an uniformed player, (principal or designer) can induce privately informed agents to reveal their information. This will leads us, inter alia, to the theory of auctions and related optimal trading problems. In contrast, in signaling models the informed agent attempts to credible convey its information to the uninformed player or the market. Finally, optimal contracts are analyzed in environment where the private information only arises after contracting, which is referred to as the moral hazard problem.

**Required texts **(available at Labyrinth Bookstore)**:**

- Andreu Mas-Collel, Michael D. Whinston and Jerry Green,
*Microeconomic Theory*(Oxford University Press, 1995). - Bernard Salanie,
*The**Economics of Contracts*(MIT Press, 2005).

**Recommended texts **(available at Labyrinth Bookstore)**:**

- Patrick Bolton and Matthias Dewatripont,
*Contract Theory*(MIT Press, 2005) - Drew Fudenberg and Jean Tirole,
*Game Theory*(MIT Press, 1991) - Robert Gibbons,
*Game Theory for Applied Economists*(Princeton University Press, 1992)

**Other useful sources:**

- Ken Binmore,
*Essays on the Foundations of Game Theory*

(Basil Blackwell, 1990) - Ken Binmore,
*Playing for Real*(Oxford University Press, 2007)

- David M. Kreps,
*A**Course in Microeconomic Theory*

(Princeton University Press, 1990) - David M. Kreps,
*Game Theory and Economic Modelling*

(Oxford University Press, 1990) - Jean-Jacques Laffont and David Martimort,
*The**Theory of Incentives*

(Princeton University Press, 1990) - Jean-Jacques Laffont and Jean Tirole,
*A**Theory of Incentives in Procurement and Regulation*

(MIT Press, 1993) - George J. Mailath and Larry Samuelson,
*Repeated Games and Reputations*

(Oxford University Press, 2006) - Roger G. Myerson,
*Game Theory*

(Harvard University Press, 1991) - Martin J. Osborne and Ariel Rubinstein,
*Bargaining and Markets*

(Academic Press, 1990) - Martin J. Osborne and Ariel Rubinstein,
*A**Course in Game Theory*

(MIT Press, 1994) - Klaus Ritzberger,
*Foundations of Non-Cooperative Game Theory*

(Oxford University Press, 2002) - Jean Tirole,
*The**Theory of Industrial Organization*

(MIT Press, 1988)

**Schedule **(Homework is due in class on Tuesday, one week after being assigned)**:
**

**Lecture Notes **I frequently use my own lecture notes. An earlier version of these notes is here, and while I now present the material differently, they might still be useful as reference.

**II: Games of Incomplete Information**

**Tuesday****, March 4: **Introduction into Information Economics

**Thursday****, March 6: ** Bayesian Nash Equilibrium, Pure Strategy Bayes-Nash Equilibrium, Purification, Global Games

**Tuesday****, March 25: **Adverse Selection, Monopoly Pricing

**Thursday****, March 27: **Second Degree Price Discrimination, Incentive Compatibility

- Stole (1999): Lectures on Contracts: a very nice set of lectures notes

**Tuesday****, April 1: **Vickrey-Groves-Clark, Revelation Principle

**Thursday****, April 3: **First and Second Price Auctions, Bilateral Trade** **

**Tuesday****, April 8: ** All Pay Auctions, Revenue Equivalence,

**Thursday****, April 10: **Bilateral Trade,** **

Myerson (1981) Optimal Auction, Myerson and Sattherthwaite (1983) Bilateral Trade

**Tuesday, April 15:** Optimal Auctions, Moral Hazard

**Thursday****, April 17: **Moral Hazard in Teams

- Holmstrom (1979),
- Holmstrom and Milgrom (1991)

**Tuesday****, April 22: **Signalling and Communication,

- Job Market Signalling
- Spence (1973)

**Thursday****, April 24:** Intuitive Criterion, Equilibrium Domination, Disclosure and Bayesian Persuasion.** **

Final Exam 2014, Final Exam 2014 Solution

**Past Exams:**

Final Exam 09-10 , Final Exam 09 -10 Solution