Nir Dagan / Teaching

Microeconomics I

Universitat Pompeu Fabra, Academic year 1998/99

Antonio Cabrales and Nir Dagan [Contact information]

The course's website in Spanish (maintained by Antonio Cabrales)

Homework assignments

Introduction

Grading
Weekly problem sets (10%).
Midterm exam (30%).
Final Exam (60%).

This course studies the relationships between economic agents when information is imperfect and asymmetric. That is, when there is relevant information not known to some of the decision makers.

The course concentrates on contract design in the presence of moral hazard (One participant may take actions that affect both participants, but these are not observed by the other participant); Adverse selection (One participant has relevant information concerning the pre existing situation, that may affect the payoffs of both); And signalling (One of the participants has private information useful for both, but has to take costly actions in order to reveal that information).

Major textbook

Other recommended readings

Outline

1. Introduction to the economics of information
The basics of the problem, the development of the interaction over time, and a classification of problems with asymmetric information.
2. The benchmark model: contracts with complete information
Optimal payment mechanism and the optimal level of effort.
3. The moral hazard problem (I).
The case of two possible effort levels and its solution. A simple example with a continuum of possible effort levels.
4. The moral hazard problem (II): Extensions and applications.
Moral hazard and credit markets.
5. The adverse selection problem (I).
Comparison with the benchmark case. The model with two types and with a continuum of types.
6. The adverse selection problem (II): applications.
Competition in insurance market, optimal licencing, and government regulation.
7. Signalling (I).
The value of private information and signalling. Separating and pooling equilibria.
8. Signalling (II): applications.
Prices as a quality signal, the level of debt as a signal of a firm's value.

Nir Dagan / Contact information / Last modified: January 17, 1999.