Topics in economic theory
PROF. CARSTEN KRABBE NIELSEN; PROF. GERD WEINRICH
COURSE AIMS
Building on the first-year courses in Microeconomics and Macroeconomics, this
course, which is divided into two modules, brings the students closer to the frontier
of current economic research. The first module is concerned with general economic
equilibrium theory; in the second module we study the microeconomics of
financial intermediation and the regulation of banks.
COURSE CONTENT
In the first part of the course we study the theory of general equilibrium, both in a
Walrasian and in a non-Walrasian setting. After having developed the Walrasian
model and derived its properties in terms of welfare, we shall introduce factors like
externalities and public goods to understand how they invalidate the previous
efficiency results and, moreover, which are possible measures to restore optimality.
In the final chapter we extend the Walrasian model to a non-Walrasian formulation
so as to be able to describe feasible and consistent allocations also when prices are
not market-clearing due to imperfect flexibility.
In the second part of the course we shall study, using formal microeconomics
models, the functioning of banks, the format of the loan contract, the possibility of
credit rationing and the reasons for regulating banks. Since the economic crisis of
2008-2009 started as a crisis in the financial sector which in turn was perceived as
being at least partly due to inadequate regulation of banks and other financial
institutions there are currently many ongoing discussions about how regulation can
be improved. We shall relate to this discussion, among politicians, practitioners
and economists, as we develop our understanding of the formal models.
I MODULE: General equilibrium theory.
1. Introduction.
2. The Walrasian model of general equilibrium.
2.1 Consumers’ behavior.
2.2 Producers’ behavior.
2.3 General equilibrium and Walras’ law
2.4 Pure exchange and the Edgeworth box
2.5 Properties of general equilibrium
2.6 Pareto efficiency
2.7 Welfare theorems
3. Failures of the “Invisible Hand”: externalities.
3.1.
3.2.
3.3.
3.4.
The nature of externalities.
Externalities in the consumers’ sector.
Externalities in the producers’ sector.
Restoring of efficiency: internalization of the externality, markets for the
right of producing externalities, taxation of externalities.
4. Failures of the “Invisible Hand”: public goods.
4.1The nature of public goods.
4.2Inefficiency in a system with voluntary contributions.
4.3Lindahl equilibrium.
5. Non-Walrasian economics.
5.1Introduction.
5.2The basic macromodel with rationing.
5.3General (dis-) equilibrium with rationing.
5.4Applications.
II MODULE: The microeconomics of financial intermediation. (12 lectures)
6. Review of basic contract theory: asymmetric information (adverse selection,
moral hazard, signaling) incentive constraints, truth telling constraints.
7. What do banks do? Irrelevance of banks in a classical general equilibrium
model: the Modigliani-Miller Theorem. F&R. Ch. 1.1 – 1.7.
8. The role of financial intermediation: liquidity insurance, coalition of borrowers
and adverse selection. F&R, 2.2 and 2.3. Bank runs. F&R 7.2.
9. The role of financial intermediation: delegated monitoring, bank debt versus
market debt. F&R 2.4 and 2.5.
10. Monopolistic competition in the banking sector. F&R 3.3.
11. Relationship banking. F&R 3.6.
12. The borrower-lender relationship: costly state verification and moral hazard.
F&R 4.2. and 4.4.
13. The borrower-lender relationship: moral hazard, collateral. F&R 4.4. and 4.6.
14. Credit rationing. F&R 5.1 – 5.3.2.
15. Credit rationing. F&R 5.3.3. and 5.4.
16. Regulation of banks: deposit insurance and moral hazard. F&R, 9.1 – 9.4.2.
17. Regulation of banks. Capital control versus deposit rate regulation. Repullo
(2004).
READING LIST
For the first module, lecture slides will be made available on Blackboard. Related material
can be found in HAL R. VARIAN, Microeconomic Analysis, New York, London: Norton, 1992,
and some journal articles that will be specified later.
For the second module, references will be made to X. FREIXAS-J.C. ROCHET, Microeconomics of
Banking, Cambridge, Mass. London, MIT Press, 2008 (F&R).
R. REPULLO, Capital requirements, market power, and risk-taking in banking, Journal of Financial
Intermediation, 13, 2004, 156-182.
TEACHING METHOD
Lectures.
ASSESSMENT METHOD
Written closed book exam. Duration 2 hours (1 hour for each module).
NOTES
Contact information:
Carsten.nielsen@unicatt.it
Gerd.weinrich@unicatt.it