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MICROECONOMICS 2

Program

Updated A.Y. 2018-2019

The first objective of this course is to make students familiar with strategic thinking. The
second one is to introduce them to the theoretical analysis of incentive problems, and on their
implications for our understanding of competitive markets. The course is based on standard
textbooks, but I will also refer to a few journal articles. No background beyond undergraduate
microeconomics is required, although familiarity with analytical reasoning is assumed.


A) Game theory: a general introduction

The course starts with an introduction to game theory. The distinction between normal form
and extensive form is introduced. The corresponding equilibrium concepts are presented and
discussed. Specifically, we plan to cover the following issues:

1. Static games of complete Information: main solution concepts. Existence theorems. Applications:
models of imperfect competition.
2. Dynamic games of complete information. Representation through extensive form and
backward induction. Subgame perfection. Introduction to repeated games. Applications:
bargaining models.
3. Games of incomplete information and bayesian equilibria.
Textbook: R. Gibbons “A Primer in Game Theory”, 1992, Chapters 1-3.

B) Markets with Private Information

This part of the course analyzes the role of asymmetric information and contracting in market settings. We plan to cover the following issues:

1. Adverse selection. Applications: Competitive screening and signalling in the labor market.
2. Moral hazard. Application: Strategic default in financial markets.Textbook: Mas Colell, A., Whinston M., and J Green “Microeconomic Theory” , 1995; Chapter 13.