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JOHN CABOT UNIVERSITY
COURSE CODE: "EC 328"
COURSE NAME: "Economics of Information"
SEMESTER & YEAR:
Spring 2020
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SYLLABUS
INSTRUCTOR:
Francesco Ruscitti
EMAIL: [email protected]
HOURS:
MW 11:30 AM 12:45 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.
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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).
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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 word of caution: If you are not already familiar with calculus and intermediate micro and you struggle with abstract and analytical reasoning (and graphical analysis and formal proofs), this is not the right course for you. Likewise, if you are not committed to working hard and attending all lectures, I am afraid you selected the wrong class. If, instead, you want to learn an important, highly regarded field that not only looks good on your resume but also provides good preparation and fundamental knowledge for further studies and graduate school, then this is the right course for you.
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).
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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.
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TEXTBOOK:
Book Title | Author | Publisher | ISBN number | Library Call Number | Comments | Format | Local Bookstore | Online Purchase |
Incentives: Motivation and the Economics of Information, 2nd Edition, 2006 | Donald E. Campbell | Cambridge University Press | ISBN: 9780521539746 | | | | | |
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REQUIRED RESERVED READING:
RECOMMENDED RESERVED READING:
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GRADING POLICY
-ASSESSMENT METHODS:
Assignment | Guidelines | Weight |
Midterm exam 1 | The 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 exam | The 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 analytical | 48% |
-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 hinge upon scholarly journal articles (and my own lectures), if you do not attend, you get really lost and your performance would be severely undermined. I am positive about it. Therefore, I will take attendance. Attendance is mandatory. If you really have to miss a class, please let me know beforehand. If you have a very good reason for skipping a class, I will not penalize you. Just speak with me. I will try to be as flexible as possible in accommodating your request and meeting your needs.
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.
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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.
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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.
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SCHEDULE
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TOPICS AND TENTATIVE SCHEDULE
The list and schedule of the topics covered is tentative and might be subject to change. Also, there might not be enough time to cover all of the topics indicated below. More details will be provided in class.
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Weeks
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Topics
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Reading Assignment
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Exams dates and topics covered (TBA)
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1, 2
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BASIC MODELS, TOOLS AND CONCEPTS, AND ADVERSE SELECTION (HIDDEN-CHARACTERISTICS MODELS)
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Introduction to the topic. Quasi-linear preferences, decision making under uncertainty.
Akerlof’s market for “lemons” (the used-car market)
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Notes taken in class; constrained optimization methods (posted notes); lecture notes and articles (posted). Akerlof’s model is based on the paper: “The market for lemons: quality uncertainty and the market mechanism” (posted).
See also chapters 2 and 5 of the textbook.
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3, 4 and 5
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JOB-MARKET SIGNALING
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Signaling
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Notes taken in class; lecture notes and articles (posted); a more formal treatment of signaling (signaling games) can be found in Gibbons’ Game Theory books (posted). Michael Spence’s job-market signaling model is based on the paper “Job Market Signaling” (posted). See also chapter 5 of the textbook.
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6, 7
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CREDIT RATIONING
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Hidden action, hidden characteristics and the credit market with imperfect information
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Notes taken in class; lecture notes and articles (posted); Stiglitz and Weiss’ credit rationing model is based on the paper “Credit Rationing in Markets with Imperfect Information” (posted). See also chapter 5 of the textbook.
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8, 9
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SCREENING AND INSURANCE
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Uncertainty, demand for insurance, moral hazard and market for insurance
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Notes taken in class; lecture notes and articles (posted); Rothschild and Stiglitz’s insurance market model is based on the paper “Equilibrium in Competitive Insurance Markets: An Essay On The Economics of Imperfect Information” (posted). See also chapters 2, 3 and 5 of the textbook.
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10, 11, 12
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MORAL HAZARD AND INCENTIVE CONTRACTING (OPTIMAL CONTRACTS). PRINCIPAL-AGENT MODELS
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Agency theory with observable and unobservable effort and relative applications
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Notes taken in class; lecture notes on principal-agent models (posted) along with constrained optimization methods (posted); for constrained optimization, see also chapter 2 in the textbook; see also the PowerPoint slides (posted); see also chapter 4 of the textbook. It is useful also to look at D. Levinthal, “A survey of agency models of organizations”, 1988 (posted).
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13, 14
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ADVERSE SELECTION AND SIGNALING: A MORE RIGOROUS ANALYSIS (time permitting)
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A more thorough and formal analysis of adverse selection and signalling (time permitting)
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Notes taken in class; lecture notes (posted); relevant sections in the books on Game Theory (posted). See also chapter 5 of the textbook.
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