ECONOMICS 755: THE ECONOMICS OF INFORMATION
Fall 2014
Office: 450 B&E: MW 1-2PM
Professor Ken Snowden
E-mail: snowden@uncg.edu
In this course we examine a set of ideas, models and concepts that have influenced all areas of
economics over the past thirty years. Market participants and observers have noted for centuries
that asymmetries of information can have substantial impacts on individual behavior, market
outcomes and even market institutions. Until the early 1970s, however, these considerations were
not integrated into standard economic theory. We will trace the development of this literature with
special emphasis on how it has been integrated into applied research that focuses on health, labor,
and credit markets.
The literature on the economics of information is voluminous and this course provides an
introduction and a stepping stone to further exploration. To that end, specific course goals are to:
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Characterize market environments prone to moral hazard and/or adverse selection.
Describe the impacts of moral hazard and adverse selection on resource allocation and
risk-sharing.
Characterize how contracts can preserve incentives in the presence of moral hazard.
Characterize for pooling and separating equilibria in the presence of adverse selection.
Assess the impacts of asymmetric information has in labor, health and credit markets.
Course Materials, Assignments and Grades
The course requires two texts. An Introduction to the Economics of Information by Ines
Macho-Stadler and J. David Perez-Castrillo, (2nd Edition, Oxford University Press, 2001), is a
concise introduction to the relevant theory that will allow us to move the discussion quickly to
empirical methods and applications. You might also want to purchase Contract Theory by
Patrick Bolton and Mathias Dewatripont (MIT Press, 2005). This latter book is a more complete,
sophisticated and unified treatment of the theory we will examine. The theoretical material is
also treated in Mas-Colell, Whinston and Green and we will make reference to it as well.
In addition to completing the required readings in the course schedule, you are responsible for
five graded activities:
1. Homework including Presentation of two solved exercises
2. Presentation (in teams) of Applications in Weeks 7 & 12
3. Take Home Examinations I and II in Week 7 & 12
4. Paper & Presentation on 12/8, 12-3PM
15% of Course Grade.
20% of Course Grade
40% of Course Grade.
25% of Course Grade
As you can see, the course is designed as a mixture of lectures and a structured seminar. My goal is
for you to learn by reading, presenting and writing about the relevant ideas and literature.
Spring 2014
COURSE SCHEDULE: Economics 755
Page 2
Note: Below (MP) refers to Intro to Economics of Information by Macho-Stadler and Perez-
Castrillo. (BD) refers to Contract Theory by Bolton and Dewatripont.
Initials shown in bold and underlined indicate required class presentations.
Week/Dates
Topic
Readings; Assignments (Ex. #, Sec. #)
1 (8/20)
Introduction
MP Ch. 1,
Snyder & Nicholson , 11th ed. (212-18)
2 (8/27)
Perfect Information
MP Ch. 2; BD: (Sec. 1.1, 1.2)
Problem Set 1
I. Moral Hazard
3 (9/3)
Moral Hazard
Pauly (1968); MP 35-40,
BD: (Sec. 1.3.2)
MP: (Ex. 2.1, 2.2, 2.4| DS, CP)
4 (9/10)
Moral Hazard
MP 57-63; BD: 129-37;
MP: (Ex. 3.2,3.3, 3.4 |MM,RQ,TF)
5 (9/17)
Moral Hazard
MP 47-51, 63-66; BD 142-52
MP: (Ex. 3.6, 3,7,3.8 | JN,MZ)
6 (9/24)
Moral Hazard
MP 87-100; BD 27-30, 34-6
MP: (Ex. 3.9, 3.11, 3.12 |MM, RQ, DS)
7 (10/1)
Presentation of Applications
(TF, JN): Managerial Incentives
BD 4.6.1 (157-62) & MP 3B.1 (66-68)
(CP, MZ) Debt Financing
BD 4.6.2 (162-8) & MP 3B.3 (72-5)
(DS, MM, RQ): Tech Transfer
MP 3B.4 (75-79)
Take Home EXAM I (1PM 10/1- 5PM 10/3)
II. Adverse Selection
8 (10/8)
Adverse Selection I
Akerlof (1970); MP pp. 101-06
BD: (Sec. 1.3.1)
9 (10/8)
Adverse Selection I
MP pp. 110-16;
Adverse Selection III
MP pp. 117-26, 142-9;
MP: (Ex. 4.2, 4.4, 4.5 | TF, MZ)
Rothschild & Stiglitz (1976)
10 (10/15)
Spring 2007
Week/Dates
ECONOMICS 755: Information Economics
Topic
Page 3
Readings; Assignments (Ex. #, Sec. #)
II. Adverse Selection (Continued)
11 (10/22)
Adverse Selection IV
MP 127-35; BD 2.1 (47-56);
MP: (Ex. 4.6, 4.8, 4.9 | MM, CP, RQ)
12 (10/29)
Adverse Selection V
MP: (Ex. 4.10, 4.11, 4.7 | JN, DS)
13 (11/ 5)
Presentation of Applications
(DS, MZ): Optimal Taxation
BD: 2.2.2 (pp. 62-67)
(TF, JN) Implicit Labor Contracts
BD: 2.2.3 (PP. 67-74)
(MM, CP, RQ) Regulating Monopoly
MP: 4B.3 & 4B.4 (pp. 153-59)
Take Home EXAM II (1PM 11/5 – 5PM 11/7)
III. Signaling
14 (11/12)
Signaling I
MP: 185-99;
Spence (1973)
15 (11/19)
Signaling II
MP: 5.5
MP: 5B.1-5B.3
16 (12/8)
Presentation of Papers: 12-3 PM
[Note: Papers will surveyat least 2 related journal articles chosen by students.]
Required Readings
M. Pauly (1968). “The Economics of Moral Hazard: Comment,” American Economic Review
58:3 Part 1, June 531-7.
G. Akerlof (1970). “The Market for Lemons: Qualitative Uncertainty and the Market
Mechanism,” Quarterly Journal of Economics, 84 (3), 1970, pp. 488-500.
M. Spence (1973). “Job Market Signaling,” Quarterly Journal of Economics, 87: 355-74.
M. Rothschild and J. Stiglitz (1976). “Equilibrium in Competitive Insurance Markets: The
Economics of Imperfect Information,” Quarterly Journal of Economics, 90: 541-62.
Spring 2007
ECONOMICS 755: Information Economics
Page 4
Assigned Exercises and Applications to be Presented in Class
Week/Dates
Students
Exercises
Part A: Moral Hazard
3 (9/3)
Derek Strong, Chris Parrish
MP: (Ex. 2.1, 2.2, 2.4)
4 (9/10)
Minoo Modaresnezhad, Rony Qian, Tim Ferland
MP: (Ex. 3.2, 3.3, 3.4)
5 (9/ 17)
Jonathan Norris, Maozhao Zheng
MP: (Ex. 3.6, 3.7, 3.8)
6 (9/24)
Minoo Modaresnezhad, Rony Qian, Derek Strong
MP: (Ex. 3.9, 3.11, 3.12)
7 (10/1)
Ferland & Norris: Managerial Incentives
BD 4.6.1 (157-62) &
MP 3B.1 (66-68)
BD 4.6.2 (162-8) &
MP 3B.3 (72-5)
MP 3B.4 (75-79)
Parrish & Zheng : Debt Financing
Modaresnezhad, Qian & Strong: Tech Transfer
Part B: Adverse Selection
10(10/15)
Ferland & Zheng
MP: (Ex. 4.2, 4.4, 4.5)
11(10/22)
Modaresnezhad, Parrish &Qian
MP: (Ex. 4.6, 4.8, 4.9)
12 (10/29)
Norris & Strong
MP: (Ex. 4.10, 4.11, 4.7)
131 (11/5)
Ferland & Norris: Implicit Labor Contracts
BD 2.2.3 (67-74)
Strong & Zheng : Optimal Taxation
BD 2.2.2 (62-67)
Modaresnezhad, Parrish & Qian: Monopoly
MP 4B.3 & 4B.4 (153-59)