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JOHN CABOT UNIVERSITY

COURSE CODE: "EC 328"
COURSE NAME: "Economics of Information"
SEMESTER & YEAR: Spring 2019
SYLLABUS

INSTRUCTOR: Francesco Ruscitti
EMAIL: [email protected]
HOURS: MW 4:30-5:45 PM
TOTAL NO. OF CONTACT HOURS: 45
CREDITS: 3
PREREQUISITES: Prerequisite: EC 301; Recommended: MA 208
OFFICE HOURS: Before class (whenever possible) and by appointment. To make an appointment, just approach me in class or send me an email ahead of time.

COURSE DESCRIPTION:
This course examines incentive mechanisms at work in a wide range of environments to see if and how coordination can be achieved by informing and motivating individual decision makers. It also examines the performance of agents hired to carry out specific tasks, from taxi drivers, employees, to CEOs.
Students will be introduced to a range of economic tools used to study models that explicitly involve contracting in economics and finance under imperfect and asymmetric information. The methods developed can be employed to investigate the performance of various institutions (e.g., voting schemes) to see if they enhance general well-being. Techniques studied include agency theory and signaling models. In addition, some applications of the tools will be covered (e.g., labor market, credit market and insurance markets).
SUMMARY OF COURSE CONTENT:

Note: This is a preliminary draft of the syllabus. When the semester starts, I will hand out and post the official version of the syllabus (much more detailed than this draft) including all of the policies and the exact exam dates. 

Note: Knowledge of intermediate microeconomics and calculus is indispensable for this course. Hence, it will be assumed and taken as given. Moreover, basic statistics may be used throughout the course.

A basic knowledge of Economics of information is a fundamental component of the tool kit of any economist and finance professional. This course is appealing to both Economics and Finance students, especially those ones who plan on pursuing graduate programs in Economics or Finance. This is a theoretical course and the material covered is intellectually challenging and stimulating. Yet, the theory developed is applicable to many contexts. This course provides an introduction to a variety of issues that fall under the general heading of the economics of information and uncertainty. In this class, we will study the equilibrium and efficiency properties of markets in which there are information frictions, in the sense that market participants have limited information regarding the quality and price of various goods. This course introduces students to a range of economic tools and concepts used to study models explicitly involving economic agents with incomplete and asymmetric information. Consider a situation in which two (or more) agents are involved in a mutual agreement. It is very often the case that one economic agent has more information than the other about a characteristic that is relevant to the agreement. In this course, we will study how agents deal with this information asymmetry by designing incentives and embedding them in contracts. We will show that realistic information frictions can provide a simple and natural explanation for credit rationing, wage inequality, as well as for other phenomena that cannot be understood if there is full information. Moreover, we will show that, once information frictions are taken into account, the market allocation need not be efficient and appropriate government interventions (or market responses) may lead to welfare gains.

Summary: Adverse selection (hidden type models) and market responses to adverse selection: signalling, screening. Moral hazard (hidden action models) and incentive contracting (principal-agent models). Applications of the theory include market for insurance, labor market, credit market and credit rationing, price discrimination. Applications of the principal-agent model include the employer-employee relationship, the owner-manager relationship, medical doctor-patient relationship, and many other everyday life situations (asymmetric information is pervasive).

LEARNING OUTCOMES:

First of all, the objective is that students develop analytical skills and learn to work with simple yet formal economic models. Students will develop the ability to model simple economic phenomena using elementary math. In addition,

Students will learn to formalize and analyze models involving asymmetric information and to use these models to explain a variety of economic phenomena that cannot be understood using full information models.

Students will learn to analyze realistic, incompletely specified problems of the sort that confront consultants, managers, policy makers, entrepreneurs and others. 

Referring to the learning outcomes (LOS) of the Economics and Finance major (that are posted online), upon successful completion of this course students will:

LOS 1: Build a solid understanding of and knowledge base in microeconomics.

LOS 2: Develop critical-thinking skills and learn to apply microeconomic analysis to understand economic events and everyday problems.

LOS 5: Develop adequate training in mathematical methods to develop problem-solving skills, perform proofs and prepare for further graduate studies in the areas of economics and finance.

LOS 6: Master solid communication skills that enable them to formulate a well-organized argument and communicate effectively in written and graphical form about specific economic and financial issues.

TEXTBOOK:
Book TitleAuthorPublisherISBN numberLibrary Call NumberComments
Incentives: Motivation and the Economics of Information, 2nd Edition, 2006Donald E. CampbellCambridge University PressISBN: 9780521539746  
REQUIRED RESERVED READING:
NONE

RECOMMENDED RESERVED READING:
NONE
GRADING POLICY
-ASSESSMENT METHODS:
AssignmentGuidelinesWeight
Midterm exam 1The exam will be worth 100 points. It will cover all the material taught up to the class before the exam day. Numerical problems and open-ended questions. Regardless of the format, the nature of the questions will be analytical.18%
Midterm exam 2 (or in-class formal presentation, TBA)The exam will be worth 100 points. It will cover all the material taught from Midterm exam 1 onward. Numerical problems and also open-ended questions. Regardless of the format, the nature of the questions will be analytical.34%
Final examThe exam will be worth 100 points. It will be cumulative, that is it will be about all the material covered throughout the course. Numerical problems and also open-ended questions. Regardless of the format, the nature of the questions will be analytical48%

-ASSESSMENT CRITERIA:
AWork of this quality directly addresses the question or problem raised and provides a coherent argument displaying an extensive knowledge of relevant information or content. This type of work demonstrates the ability to critically evaluate concepts and theory and has an element of novelty and originality. There is clear evidence of a significant amount of reading beyond that required for the course. 93-100: A 90-92.99: A-
BThis is highly competent level of performance and directly addresses the question or problem raised.There is a demonstration of some ability to critically evaluatetheory and concepts and relate them to practice. Discussions reflect the student’s own arguments and are not simply a repetition of standard lecture andreference material. The work does not suffer from any major errors or omissions and provides evidence of reading beyond the required assignments. 86-89.99: B+ 83-85.99: B 80-82.99: B-
CThis is an acceptable level of performance and provides answers that are clear but limited, reflecting the information offered in the lectures and reference readings. 75-79.99: C+ 70-74.99: C 65-69.99: C-
DThis level of performances demonstrates that the student lacks a coherent grasp of the material.Important information is omitted and irrelevant points included.In effect, the student has barely done enough to persuade the instructor that s/he should not fail. 60-64.99: D+ 55-59.99: D 50-54.99: D-
FThis work fails to show any knowledge or understanding of the issues raised in the question. Most of the material in the answer is irrelevant. Below 50: F

-ATTENDANCE REQUIREMENTS:

Given the nature of the subject matter, the aim of the course, and since the course readings will be based mainly on journal articles (and lecture notes posted by the instructor) and the Professor's lectures, if you do not attend classes you will get lost and struggle quite a lot. Therefore, I will take attendanceAttendance is mandatory. 



EXAMS AND POLICY ON ABSENCES: At the beginning of the semester I will post on MyJCU and hand out the official version of the syllabus with the exact exam dates. There are NO make-up for missed exams. If, for any compelling reasons (e.g., you are sick), you happen to miss a midterm exam, I want you to notify me ahead of time (if possible) and I would surely ask you to provide me with a formal and valid justification for the absence (you have to prove your claim about the cause of the absence). If I deem the justification is formal and merits consideration, then I would let you take a make-up exam.

ACADEMIC HONESTY
As stated in the university catalog, any student who commits an act of academic dishonesty will receive a failing grade on the work in which the dishonesty occurred. In addition, acts of academic dishonesty, irrespective of the weight of the assignment, may result in the student receiving a failing grade in the course. Instances of academic dishonesty will be reported to the Dean of Academic Affairs. A student who is reported twice for academic dishonesty is subject to summary dismissal from the University. In such a case, the Academic Council will then make a recommendation to the President, who will make the final decision.
STUDENTS WITH LEARNING OR OTHER DISABILITIES
John Cabot University does not discriminate on the basis of disability or handicap. Students with approved accommodations must inform their professors at the beginning of the term. Please see the website for the complete policy.

SCHEDULE

TOPICS AND TENTATIVE SCHEDULE

 

(Please note that the list and schedule of the topics mentioned below might be subject to change. More details will be provided in class)


 

 

 

 

Weeks

Topics

Reading Assignment

Exam dates and topics covered (TBA)

 

KNOWLEDGE, INFORMATION AND ALLOCATION OF RESOURCES

 

 

1

Equilibrium, asymmetric information, and efficiency.

Chapters 1 and 2 of F. A. Hayek, “The use of knowledge in society”, 1945.

 

 

BASIC MODELS, TOOLS, AND ADVERSE SELECTION

 

 

2, 3 and 4

Lagrangian multipliers, quasi-linear preferences, decision making under uncertainty and Akerlof’s market for “lemons”

Hidden characteristics and the used-car market (chapters 2 and 5 of George A. Akerlof, “The market for “lemons”, 1970

 

 

 

SIGNALING

 

 

5, 6

Signaling

Hidden characteristics and job market signaling (chapters 2 and 5 of M. Spence, “Job market signaling”, 1973.

 

 

CREDIT RATIONING

 

 

7 and 8

Hidden action, hidden characteristics and the credit market

Hidden action and characteristics and credit rationing (chapters 3 and 5 of J. E. Stiglitz, and A. Weiss, “Credit rationing in markets with imperfect information”, 1981.

.

 

SCREENING AND INSURANCE

 

 

9 and 10

Uncertainty, demand for insurance and Insurance Markets

Hidden action and characteristics and insurance (chapters 2, 3 and 5 of M. Rothschild, J. Stiglitz, “Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information”, 1976.

 

 

MORAL HAZARD AND INCENTIVE CONTRACTING (OPTIMAL CONTRACTS)

 

 

11, 12 and 13

Agency theory with observable and unobservable effort and relative applications

Basic tools, hidden action and agency theory with applications to corporate governance (chapters 2, 3 and 4 of D. Levinthal, “A survey of agency models of organizations”, 1988.

 

14

Additional topics on agency theory

 

 

 

 

 

Final exam (comprehensive): see the university schedule for date and time.