NORTH CAROLINA STATE UNIVERSITY GRADUATE COURSE ACTION FORM

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1 NORTH CAROLINA STATE UNIVERSITY GRADUATE COURSE ACTION FORM NOTE: Click once on shaded fields to type data. To check boxes, right click at box, click Properties, and click Checked under Default Values. DEPARTMENT/PROGRAM Economics COURSE PREFIX/NUMBER ECG 702 PREVIOUS PREFIX/NUMBER DATE OF LAST ACTION 9/12/1991 COURSE TITLE ABBREVIATED TITLE type previous course prefix/number here Microeconomics II MICROECONOMICS II SCHEDULING Fall Spring Summer Every Year Alt. Year Odd Alt. Year Even Other COURSE OFFERED BY DISTANCE EDUCATION ONLY ON CAMPUS ONLY CREDIT HOURS 3.0 BOTH ON CAMPUS AND BY DISTANCE EDUCATION CONTACT HOURS Lecture/Recitation 3.0 Seminar Laboratory Problem Studio Independent Study/Research Internship/Practicum/Field Work TYPE OF PROPOSAL New Course Drop Course Course Revision Dual-Level Course REVISION Content Prefix/Number Title Abbreviated Title Credit Hours Contact Hours Grading Method Pre-Corequisites Restrictive Statement Description Scheduling GRADING ABCDF S/U INSTRUCTOR (NAME/RANK) Theofanis Tsoulouhas, Associate Professor Graduate Faculty Status Associate Full ANTICIPATED ENROLLMENT Per semester 25 Max.Section35 Multiple sections Yes No PREREQUISITE(S) ECG 701 COREQUISITE(S) PRE/COREQUISITE FOR RESTRICTIVE STATEMENT CURRICULA/MINORS Required Qualified Elective type course numbers here type course number(s) here type BRIEF statement here type program name here type elective name here PROPOSED EFFECTIVE DATE Spring 2006 APPROVED EFFECTIVE DATE CATALOG DESCRIPTION (limit to 80 words): General equilibrium. Economics of information and uncertainty. Game theory. Mechanism design and social choice. Contract theory. DOCUMENTATION AS REQUIRED Please number all document pages Course Justification Proposed Revision(s) with Justification Student Learning Objectives Enrollment for Last 5 Years New Resources Statement Consultation with other Departments Syllabus (Old and New) Explanation of differences in requirements of dual-level courses RECOMMENDED BY: Department Head/Director of Graduate Programs Date ENDORSED BY: Chair, College Graduate Studies Committee Date College Dean(s) Date APPROVED: Dean of the Graduate School Date

2 Proposed Revisions ECG 702 REVISION IN TITLE/ABBREVIATED TITLE: Current Title: Prices, Value and Welfare Current Abbreviated Title: PRICE VALUE WELFAR Proposed Title: Microeconomics II Proposed Abbreviated Title: MICROECONOMICS II Justification: We propose a title change to better reflect the content and sequencing of the course. REVISION IN DESCRIPTION: Current Description: Production and duality theory. Demand for and supply of factors of production. Theories of capital and interest. Welfare economics topics, including externalities, compensation, public goods and the social welfare function. General equilibrium. Proposed Description: General equilibrium. Economics of information and uncertainty. Game theory. Mechanism design and social choice. Contract theory. Justification: We propose a description change to better reflect the content of the course. REVISION IN SYLLABUS: There is no change in the syllabus of the course.

3 Five-Year Enrollment History ECG 702 Prices, Value and Welfare (Proposed Title: Microeconomics II) Fall Spring Summer

4 OLD SYLLABUS North Carolina State University ECG 702: Microeconomic Theory Spring 2005 Prof. Theofanis Tsoulouhas Home page: Course page: Prerequisite : ECG701 Incompete Grade/Late Policy : Incomplete or late grades will only be given in legitimate cases such as medical emergencies or other special circumstances. Tentative Course Outline Texts 1) A. Mas-Colell, M.D. Whinston and J.R.Green, Microeconomic Theory, Oxford, (Required.) 2) A. Jehle and P.J. Reny, Advanced Microeconomic Theory, Second Edition, Addison Wesley, (Required.) 3) R. Gibbons, Game Theory for Applied Economists, Princeton, (Optional.) 4) J.-J. Laffont and D. Martimort, The Theory of Incentives, Princeton, (Optional.) uggested Readings 1) G. Debreu, Theory of Value, ) L. Hurwicz, D. Schmeidler and H. Sonnenschein (Eds.), Social Goals and Social Organization: Essays in Memory of Elisha Pazner, ) W. Hildenbrand and A. P. Kirman, Equilibrium Analysis, ) J. Eatwell, M. Milgate and P. Newman (Eds.), The New Palgrave: Allocation, Information and Markets, Norton, ) E. Silberberg, The Structure of Economics: A Mathematical Analysis, Second Edition, ) D. M. Kreps, A Course in Microeconomic Theory, Princeton, ) J-J. Laffont, The Economics of Uncertainty and Information, MIT, ) R. B. Myerson, Game Theory, Analysis of Conflict, ) H. R. Varian, Microeconomic Analysis, Third Edition, Norton, ) H. R. Varian, Intermediate Microeconomics, Third Edition, ) B. Salanié, The Economics of Contracts, MIT, (12) P. Bolton and M. Dewatripont, Contract Theory, MIT, (13) Ian Molho, The Economics of Information: Lying and Cheating in Markets and Organizations, Blackwell, 1997.

5 Lecture Readings An asterisk (*) indicates minimum required reading. Note that texts are on reserve at the library, and papers can be accessed on the Web through the library s Electronic Reserves. Just go to my Web page and follow the links to ECG 702. You will need your Unity ID and password to proceed. Prerequisite Read Chs. 1-4 in Jehle and Reny and Chs. 1-5 in Mas-Colell et al. The Economics of Uncertainty and Information (*) Mas-Colell, Ch. 6. (*) Jehle and Reny, Ch Varian, Ch. 11. Laffont, Chs. 1-3,8. Introduction to Game Theory (*) Mas-Colell, Chs. 7,8,9. (*) Jehle and Reny, Ch. 7. Varian, Ch. 15. (*) Gibbons, Chs Application: Oligopoly (*) Mas-Colell, Ch. 12. (*) Jehle and Reny. Ch Varian, Chs. 15,16. Molho, Part 2. (*) Gibbons, Chs General Equilibrium, Welfare Economics and Resource Allocation 1. Introduction to General Equilibrium Theory and Resource Allocation Varian (Intermediate), Chs (*) Mas-Colell, Chs. 10, Existence (*) Mas-Colell, Ch. 17, and the mathematical appendix. (*) Jehle and Reny, Chs , and the mathematical appendix. Varian, Chs. 17,18,21, and the mathematical appendix. The New Palgrave: Efficient Allocation. 3. Walras-Arrow-Debreu Equilibria and Pareto Efficiency (*) Mas-Colell, Chs. 10,11,16. Varian, Chs. 17,18,24. (*) The New Palgrave: Externalities, The Coase Theorem. 4. Core Theory (*) Mas-Colell, Ch. 18. (*) Jehle and Reny, Ch Varian, Ch. 21. (*) L. Telser, "The Usefulness of Core Theory in Economics," Journal of Economic Perspectives 8(2) (1994),

6 5. Aggregate Demand and Uniqueness of Equilibria (*) Mas-Colell, Ch. 17. (*) Varian, Chs. 18,21. Hildenbrand and Kirman, Ch. 6. Resource Allocation Mechanisms 1. Design of Performance Standards Varian (Intermediate), Ch. 30. (*) Jehle and Reny, Ch. 6. (*) Mas-Colell, Ch. 21. Varian, Ch. 22. The New Palgrave: Decentralization. 2. Introduction to Implementation (*) Mas-Colell, Chs. 22. (*) Molho, Part 4. (*) A. Sen, Rationality and Social Choice, American Economic Review 85 (1995),1-24. (*) J-J. Laffont and E. Maskin, "The Theory of Incentives: An Overview." In Advances in Economic Theory, W. Hildenbrand (Ed.), (*) E. Maskin, "The Theory of Implementation in Nash Equilibrium: A Survey." Chapter 6 in Hurwicz, Schmeidler and Sonnenschein. (*) M.O. Jackson, A Crash Course in Implementation Theory, Social Choice and Welfare 18(4) (2001), Implementation with Incomplete Information (*) Mas-Colell, Ch. 23. (*) The New Palgrave: Incentive Compatibility; Mechanism Design; Revelation of Preferences. Kreps, Ch. 18. (*) R. Myerson, "Bayesian Equilibrium and Incentive Compatibility: An Introduction." Chapter 8 in Hurwicz, Schmeidler and Sonnenschein. (*) T. Groves and J. Ledyard, "Incentive Compatibility Since 1972." In T. Groves, R. Radner and S. Reiter (Eds.), Information, Incentives and Economic Mechanisms, Introduction to Auction Theory (*) Mas-Colell, Ch. 23. (*) Jehle and Reny, Ch. 9. (*) Molho, Chs. 14,15. (*) P. Klemperer, Auction Theory: A Guide to the Literature, Journal of Economic Surveys 13(3) (1999), Also available on the Web: (*) P. Klemperer, Why Every Economist Should Learn Some Auction Theory, working paper (2001). Available on the Web: Introduction to Contract Theory 1. Introduction (*) Mas-Colell, Ch. 13. (*) Jehle and Reny, Ch. 8. (*) Molho, Parts 1-3. (*) The New Palgrave: Adverse Selection; Implicit Contracts; Hidden Actions, Moral Hazard and Contract Theory; Incentive Contracts; Moral Hazard; Principal and Agent. Varian, Ch. 25.

7 Laffont, Chs. 10,11. (*) G. Akerlof, "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," Quarterly Journal of Economics 84 (1970), (*) M. Spence, Signaling in Retrospect and the Informational Structure of Markets, American Economic Review 92 (2002), (*) J.E. Stiglitz, Information and the Change in the Paradigm in Economics, American Economic Review 92 (2002), Labor/Agency Contracts (*) Mas-Colell, Ch. 14. (*) Laffont and Martimort, Chs Varian, Ch. 25. Salanié, Chs. 1, 5. (*) O. Hart, "Optimal Labour Contracts under Asymmetric Information: An Introduction," Review of Economic Studies L (1983), (*) O. Hart and B. Holmstrom, "The Theory of Contracts." In T. Bewley (Ed.), Advances in Economic Theory, Fifth World Congress, S. Shavell, "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal 10 (1979), B. Holmstrom, "Moral Hazard and Observability," Bell Journal 10 (1979), S. Grossman and O. Hart, "An Analysis of the Principal-Agent Problem," Econometrica 51 (1983) W. P. Rogerson, "The First Order Approach to Principal-Agent Problems," Econometrica 53 (1985), W. P. Rogerson, "Repeated Moral Hazard," Econometrica 53 (1985), R. Radner, "Repeated Principal-Agent Games with Discounting," Econometrica 53 (1985), M. LiCalzi and S. Spaeter, Distributions for the First-Order Approach to Principal-Agent Problems, Economic Theory (2003), Tentative Course Grading Procedure First Midterm Exam: 20% Second Midterm Exam: 35% Final: 45% Study groups are encouraged. The final exam is cumulative. Lecture Topics and Tentative Schedule (Approx. # of classes is shown on the left.) 2 Information and uncertainty. Decision theory under uncertainty. The expected utility theorem. The Arrow-Pratt measure of risk-aversion. Stochastic dominance in the first and second order sense. Insurance. Representation of information. 3 Introduction to game theory. Static games of complete information. Iterated elimination of dominated strategies. Dominant strategy equilibrium. Nash equilibrium in pure and mixed strategies. Static games of incomplete information. The Harsanyi transformation. Bayesian games. Bayesian equilibrium in pure and mixed strategies. 3 Application: Oligopoly. 5 Reaction functions. The Cournot model. The cartel outcome. The Cournot model with n firms. The Bertrand model. Price competition with differentiated products. The Stackelberg model. Conjectural variations. Conjectural equilibrium. The Migrom-Roberts model of limit pricing. Separating and pooling outcomes. 1 First Midterm Exam.

8 3 General equilibrium theory. Walrasian equilibrium in a pure exchange economy. Walrasian equilibrium in a production economy with free disposal. 5 Existence of competitive equilibrium: mathematical preliminaries. Open and closed sets. Bounded sets. Heine-Borel theorem. Weierstrass theorem. Convex sets. Closed-graph property of correspondences. Compact valued correspondence. Upper and lower hemi-continuous correspondences. Maximum theorem. Brouwer's fixed point theorem. Kakutani's fixed point theorem. Existence of competitive equilibrium in production economies with free disposal. Approximate equilibria without convexity. The Shapley-Folkman Lemma. Uniqueness of competitive equilibrium. The gross substitutability assumption. Index analysis. Properties of aggregate excess demand in pure exchange economies. Economies with Leontief technologies. Constant returns to scale technologies. Leontief technologies. The non-substitution theorem. The price corollary to the non-substitution theorem. 3 Pareto efficiency. Pareto efficiency. Strong Pareto efficiency. Competitive equilibrium and Pareto efficiency: welfare theorems. Externalities. The Coase theorem. The core of an exchange economy. Replica economies. Equal treatment in the core. Debreu-Scarf theorem. Limit theorem for replica economies. 1 Second Midterm Exam. 3 Social Choice-Mechanism design-implementation. Arrow's Possibility theorem. The Pareto rule. The majority rule. The Borda rule. Nonmanipulability and strategy-proofness. The Gibbard-Satterthwaite theorem. Implementing games. Truthful implementation. Maskin monotonicity and Maskin's theorem. Bayesian games with communication. Direct mechanisms. Bayesian incentive compatibility. The Revelation Principle. 1 Auction theory. English, first-price sealed-bid, second-price sealed-bid (Vickrey) and Dutch auctions. Private versus common-value models. Revenue equivalence theorem. Winner s curse. Affiliated information. Linkage Principle. 3 Contract theory. Labor Contracts with asymmetric information and bankruptcy. Agency contracts with hidden action. Final Exam. Additional readings The Economics of Uncertainty and Information K. J. Arrow, Yrjö Jahnsson Lectures: Aspects of The Theory of Risk-Bearing, Helsinki, M. J. Machina, "Choice Under Uncertainty: Problems Solved and Unsolved," Journal of Economic Perspectives 1(1) (1987), General Equilibrium, Welfare Economics and Resource Allocation 1. Introduction to General Equilibrium Theory and Resource Allocation R. Radford, "The Economic Organization of a POW Camp," Economica 12 (1945), Existence K. J. Arrow and G. Debreu, "Existence of Equilibrium for a Competitive Economy," Econometrica 22 (1954),

9 E. R. Weintraub and T. Gayer, Equilibrium Proofmaking, Journal of the History of Economic Thought 23 (2001), Core Theory G. Debreu and H. Scarf, "A Limit Theorem on the Core of an Economy," International Economic Review 4 (1963), R. Anderson, "An Elementary Core Equivalence Theorem," Econometrica 46 (1978), Aggregate Demand and Uniqueness of Equilibria H. Sonnenschein, "Do Walras' Identity and Continuity Characterize the Class of Community Excess Demand Functions?" Journal of Economic Theory 6 (1973) H. Sonnenschein,"Market Excess Demand Functions"Econometrica 40 (1974) G. Debreu, "Excess Demand Functions," Journal of Mathematical Economics 1 (1974), R. Mantel, "On the Characterization of Aggregate Excess Demand," Journal of Economic Theory 7 (1974) G. Debreu, "Regular Differentiable Economies," American Economic Review 66 (1976), R. Mantel, "Homothetic Preferences and Community Excess Demand Functions," Journal of Economic Theory 12 (1979) A. Kirman and P. Koch, "Market Excess Demand in Exchange Economies with Identical Preferences and Collinear Endowments," Review of Economic Studies (1986), Resource Allocation Mechanisms 1. Introduction to Implementation L. Hurwicz, "The Design of Mechanisms for Resource Allocation," American Economic Review (Papers and Proceedings) 63 (1973), A. Gibbard, "Manipulation of Voting Schemes: A General Result," Econometrica 41 (1973), M. Satterthwaite, "Strategy-Proofness and Arrow's Conditions: Existence and Correspondence Theorems for Voting Procedures and Social Welfare Functions," Journal of Economic Theory 10 (1975), E. Muller and M. Satterthwaite, "Strategy-Proofness: The Existence of Dominant Strategy Mechanisms." Chapter 5 in 2 Hurwicz, Schmeidler and Sonnenschein. D. Schmeidler and H. Sonnenschein, "Two Proofs of the Gibbard-Satterthwaite Theorem on the Possibility of a Strategy-Proof Social Choice Function." In Decision Theory and Social Ethics, H. Gottinger and W. Leinfellner, Eds. Holland: D. Reidel Publishing, J. Moore and R. Repullo, "Implementation by Stage Mechanisms," European Economic Review 31 (1987) J. Moore and R. Repullo, "Nash Implementation: A Full Characterization," Econometrica 58 (1990), J. Moore, "Implementation in Environments with Complete Information." In Advances in Economic Theory, J.-J. Laffont, Ed. Cambridge University Press, A. Postlewaite, "Implementation via Nash Equilibria in Economic Environments." Chapter 7 in Hurwicz, Schmeidler and Sonnenschein. V. Danilov, "Implementation via Nash Equilibria," Econometrica 60 (1992), T. Yamato, "On Nash Implementation of Social Choice Correspondences," Games and Economic Behavior 4 (1992), E. Maskin, Nash Equilibrium and Welfare Optimality, Review of Economic Studies 66 (1999), Implementation with Incomplete Information R. Myerson, "Incentive Compatibility and the Bargaining Problem," Econometrica 47 (1979),

10 P. Dasgupta, P. Hammond and E. Maskin, "The Implementation of Social Choice Rules: Some Results on Incentive Compatibility," Review of Economic Studies 46 (1979), A. Postlewaite and D. Schmeidler, "Implementation in Differential Information Economics," Journal of Economic Theory 39(1) (1986), T. Palfrey and S. Srivastava, "On Bayesian Implementable Allocations," Review of Economic Studies 54(2) (1987), T. Palfrey and S. Srivastava, "Mechanism Design with Incomplete Information: A Solution to the Implementation Problem," Journal of Political Economy 97 (1989), T. Palfrey and S. Srivastava, "Implementation with Incomplete Information in Exchange Economies," Econometrica 57 (1989), D. Mookherjee and S. Reichelstein, "Implementation via Augmented Revelation Mechanisms," Econometrica 57 (1990), M.O. Jackson, "Bayesian Implementation," Econometrica 59 (1991), H. Haller, Limitations of the Revelation Principle," Economics Letters 39 (1992), Introduction to Auction Theory W. Vickrey, Counterspeculation, Auctions, and Competitive Sealed Tenders, Journal of Finance 16(1) (1961), J. Riley and W. Samuelson, Optimal Auctions, American Economic Review 71 (1981), R. Myerson, Optimal Auction Design, Mathematics of Operations Research 6 (1981), P.R. Milgrom and R. Weber, A Theory of Auctions and Competitive Bidding, Econometrica 50 (1982), E. Maskin and J. Riley, Optimal Auctions with Risk Averse Buyers, Econometrica 52 (1984) P.R. Milgrom Auction Theory, in T.F. Bewley (ed), Advances in Economic Theory, Fifth World Congress, (1987), 1-32, Cambridge University Press, Cambridge. The New Palgrave: Auctions. R. McAfee and J. McMillan, Auctions and Bidding, Journal of Economic Literature 25 (1987), J. Bulow and J. Roberts The Simple Economics of Optimal Auctions, Journal of Political Economy 97 (1989), P.R. Milgrom, Auctions and Bidding: A Primer, Journal of Economic Perspectives 3 (1989), J. Riley, Expected Revenue from Open and Sealed Bid Auctions, Journal of Economic Perspectives 3 (1989), Introduction to Contract Theory: Labor/Agency Contracts Lars Stole's Lectures on the Theory of Contracts: C. Azariadis and J. E. Stiglitz, "Implicit Contracts and Fixed Price Equilibria," Quarterly Journal of Economics 98 (Supplement) (1983), C. Azariadis, "Employment with Asymmetric Information," Quarterly Journal of Economics 98 (Supplement) (1983), S. J. Grossman and O. Hart (1983), "Implicit Contracts under Asymmetric Information," Quarterly Journal of Economics 98 (Supplement) (1983), J. Green and C. Kahn, "Wage-Employment Contracts," Quarterly Journal of Economics 98 (Supplement) (1983), C. Kahn and J. Scheinkman, "Optimal Employment Contracts with Bankruptcy Constraints," Journal of Economic Theory 35 (1985), R. E. A. Farmer, "Implicit Contracts with Asymmetric Information and Bankruptcy: The effect of Interest Rates on Layoffs," Review of Economic Studies LII (1985),

11 NEW SYLLABUS North Carolina State University ECG 702: Microeconomics II Spring 2006 Prof. Theofanis Tsoulouhas Home page: Course page: Learning Objectives the end of this course students will be able to: Read and comprehend current literature on the microeconomics of general equilibrium, welfare economics, game theory, the economics of uncertainty, and information theory. Formulate correct answers to questions on these same topics that appear on the written comprehensive exam in microeconomics for economics PhD students. Develop logically consistent economic models suitable for analysing a research question worthy of an economics PhD dissertation. Tentative Course Outline Texts 1) A. Mas-Colell, M.D. Whinston and J.R.Green, Microeconomic Theory, Oxford, (Required.) (2) A. Jehle and P.J. Reny, Advanced Microeconomic Theory, Second Edition, Addison Wesley, (Required.) (3) R. Gibbons, Game Theory for Applied Economists, Princeton, (Optional.) 4) J.-J. Laffont and D. Martimort, The Theory of Incentives, Princeton, (Optional.) uggested Readings 1) G. Debreu, Theory of Value, ) L. Hurwicz, D. Schmeidler and H. Sonnenschein (Eds.), Social Goals and Social Organization: Essays in Memory of Elisha Pazner, ) W. Hildenbrand and A. P. Kirman, Equilibrium Analysis, ) J. Eatwell, M. Milgate and P. Newman (Eds.), The New Palgrave: Allocation, Information and Markets, Norton, ) E. Silberberg, The Structure of Economics: A Mathematical Analysis, Second Edition, (6) D. M. Kreps, A Course in Microeconomic Theory, Princeton, (7) J-J. Laffont, The Economics of Uncertainty and Information, MIT, (8) R. B. Myerson, Game Theory, Analysis of Conflict, (9) H. R. Varian, Microeconomic Analysis, Third Edition, Norton, (10) H. R. Varian, Intermediate Microeconomics, Third Edition, (11) B. Salanié, The Economics of Contracts, MIT, (12) P. Bolton and M. Dewatripont, Contract Theory, MIT, (13) Ian Molho, The Economics of Information: Lying and Cheating in Markets and Organizations, Blackwell, Lecture Readings

12 An asterisk (*) indicates minimum required reading. Note that texts are on reserve at the library, and papers can be accessed on the Web through the library s Electronic Reserves. Just go to my Web page and follow the links to ECG 702. You will need your Unity ID and password to proceed. Prerequisite Read Chs. 1-4 in Jehle and Reny and Chs. 1-5 in Mas-Colell et al. The Economics of Uncertainty and Information (*) Mas-Colell, Ch. 6. (*) Jehle and Reny, Ch Varian, Ch. 11. Laffont, Chs. 1-3,8. Introduction to Game Theory (*) Mas-Colell, Chs. 7,8,9. (*) Jehle and Reny, Ch. 7. Varian, Ch. 15. (*) Gibbons, Chs Application: Oligopoly (*) Mas-Colell, Ch. 12. (*) Jehle and Reny. Ch Varian, Chs. 15,16. Molho, Part 2. (*) Gibbons, Chs General Equilibrium, Welfare Economics and Resource Allocation 1. Introduction to General Equilibrium Theory and Resource Allocation Varian (Intermediate), Chs (*) Mas-Colell, Chs. 10, Existence (*) Mas-Colell, Ch. 17, and the mathematical appendix. (*) Jehle and Reny, Chs , and the mathematical appendix. Varian, Chs. 17,18,21, and the mathematical appendix. The New Palgrave: Efficient Allocation. 3. Walras-Arrow-Debreu Equilibria and Pareto Efficiency (*) Mas-Colell, Chs. 10,11,16. Varian, Chs. 17,18,24. (*) The New Palgrave: Externalities, The Coase Theorem. 4. Core Theory (*) Mas-Colell, Ch. 18. (*) Jehle and Reny, Ch Varian, Ch. 21. (*) L. Telser, "The Usefulness of Core Theory in Economics," Journal of Economic Perspectives 8(2) (1994), Aggregate Demand and Uniqueness of Equilibria

13 (*) Mas-Colell, Ch. 17. (*) Varian, Chs. 18,21. Hildenbrand and Kirman, Ch. 6. Resource Allocation Mechanisms 1. Design of Performance Standards Varian (Intermediate), Ch. 30. (*) Jehle and Reny, Ch. 6. (*) Mas-Colell, Ch. 21. Varian, Ch. 22. The New Palgrave: Decentralization. 2. Introduction to Implementation (*) Mas-Colell, Chs. 22. (*) Molho, Part 4. (*) A. Sen, Rationality and Social Choice, American Economic Review 85 (1995),1-24. (*) J-J. Laffont and E. Maskin, "The Theory of Incentives: An Overview." In Advances in Economic Theory, W. Hildenbrand (Ed.), (*) E. Maskin, "The Theory of Implementation in Nash Equilibrium: A Survey." Chapter 6 in Hurwicz, Schmeidler and Sonnenschein. (*) M.O. Jackson, A Crash Course in Implementation Theory, Social Choice and Welfare 18(4) (2001), Implementation with Incomplete Information (*) Mas-Colell, Ch. 23. (*) The New Palgrave: Incentive Compatibility; Mechanism Design; Revelation of Preferences. Kreps, Ch. 18. (*) R. Myerson, "Bayesian Equilibrium and Incentive Compatibility: An Introduction." Chapter 8 in Hurwicz, Schmeidler and Sonnenschein. (*) T. Groves and J. Ledyard, "Incentive Compatibility Since 1972." In T. Groves, R. Radner and S. Reiter (Eds.), Information, Incentives and Economic Mechanisms, Introduction to Auction Theory (*) Mas-Colell, Ch. 23. (*) Jehle and Reny, Ch. 9. (*) Molho, Chs. 14,15. (*) P. Klemperer, Auction Theory: A Guide to the Literature, Journal of Economic Surveys 13(3) (1999), Also available on the Web: (*) P. Klemperer, Why Every Economist Should Learn Some Auction Theory, working paper (2001). Available on the Web: Introduction to Contract Theory 1. Introduction (*) Mas-Colell, Ch. 13. (*) Jehle and Reny, Ch. 8. (*) Molho, Parts 1-3. (*) The New Palgrave: Adverse Selection; Implicit Contracts; Hidden Actions, Moral Hazard and Contract Theory; Incentive Contracts; Moral Hazard; Principal and Agent. Varian, Ch. 25. Laffont, Chs. 10,11.

14 (*) G. Akerlof, "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," Quarterly Journal of Economics 84 (1970), (*) M. Spence, Signaling in Retrospect and the Informational Structure of Markets, American Economic Review 92 (2002), (*) J.E. Stiglitz, Information and the Change in the Paradigm in Economics, American Economic Review 92 (2002), Labor/Agency Contracts (*) Mas-Colell, Ch. 14. (*) Laffont and Martimort, Chs Varian, Ch. 25. Salanié, Chs. 1, 5. (*) O. Hart, "Optimal Labour Contracts under Asymmetric Information: An Introduction," Review of Economic Studies L (1983), (*) O. Hart and B. Holmstrom, "The Theory of Contracts." In T. Bewley (Ed.), Advances in Economic Theory, Fifth World Congress, S. Shavell, "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal 10 (1979), B. Holmstrom, "Moral Hazard and Observability," Bell Journal 10 (1979), S. Grossman and O. Hart, "An Analysis of the Principal-Agent Problem," Econometrica 51 (1983) W. P. Rogerson, "The First Order Approach to Principal-Agent Problems," Econometrica 53 (1985), W. P. Rogerson, "Repeated Moral Hazard," Econometrica 53 (1985), R. Radner, "Repeated Principal-Agent Games with Discounting," Econometrica 53 (1985), M. LiCalzi and S. Spaeter, Distributions for the First-Order Approach to Principal-Agent Problems, Economic Theory (2003), Tentative Course Grading Procedure First Midterm Exam: 20% Second Midterm Exam: 35% Final: 45% Study groups are encouraged. The final exam is cumulative. Final numerical grades will be translated to letter grades as follows: Numerical Score Letter Grade > <60 A+ A A- B+ B B- C+ C C- D+ D D- F Lecture Topics and Tentative Schedule (Approx. # of classes is shown on the left.) 2 Information and uncertainty. Decision theory under uncertainty. The expected utility theorem. The Arrow-Pratt measure of risk-aversion. Stochastic dominance in the first and second order sense. Insurance. Representation of information. 3 Introduction to game theory. Static games of complete information. Iterated elimination of dominated strategies. Dominant strategy equilibrium. Nash equilibrium in pure and mixed strategies. Static

15 games of incomplete information. The Harsanyi transformation. Bayesian games. Bayesian equilibrium in pure and mixed strategies. 3 Application: Oligopoly. 5 Reaction functions. The Cournot model. The cartel outcome. The Cournot model with n firms. The Bertrand model. Price competition with differentiated products. The Stackelberg model. Conjectural variations. Conjectural equilibrium. The Migrom-Roberts model of limit pricing. Separating and pooling outcomes. First Midterm Exam 3 General equilibrium theory. Walrasian equilibrium in a pure exchange economy. Walrasian equilibrium in a production economy with free disposal. 5 Existence of competitive equilibrium: mathematical preliminaries. Open and closed sets. Bounded sets. Heine-Borel theorem. Weierstrass theorem. Convex sets. Closed-graph property of correspondences. Compact valued correspondence. Upper and lower hemi-continuous correspondences. Maximum theorem. Brouwer's fixed point theorem. Kakutani's fixed point theorem. Existence of competitive equilibrium in production economies with free disposal. Approximate equilibria without convexity. The Shapley-Folkman Lemma. Uniqueness of competitive equilibrium. The gross substitutability assumption. Index analysis. Properties of aggregate excess demand in pure exchange economies. Economies with Leontief technologies. Constant returns to scale technologies. Leontief technologies. The non-substitution theorem. The price corollary to the non-substitution theorem. 3 Pareto efficiency. Pareto efficiency. Strong Pareto efficiency. Competitive equilibrium and Pareto efficiency: welfare theorems. Externalities. The Coase theorem. The core of an exchange economy. Replica economies. Equal treatment in the core. Debreu-Scarf theorem. Limit theorem for replica economies. Second Midterm Exam. 3 Social Choice-Mechanism design-implementation. Arrow's Possibility theorem. The Pareto rule. The majority rule. The Borda rule. Nonmanipulability and strategy-proofness. The Gibbard-Satterthwaite theorem. Implementing games. Truthful implementation. Maskin monotonicity and Maskin's theorem. Bayesian games with communication. Direct mechanisms. Bayesian incentive compatibility. The Revelation Principle. 1 Auction theory. English, first-price sealed-bid, second-price sealed-bid (Vickrey) and Dutch auctions. Private versus common-value models. Revenue equivalence theorem. Winner s curse. Affiliated information. Linkage Principle. 3 Contract theory. Labor Contracts with asymmetric information and bankruptcy. Agency contracts with hidden action. Final Exam. Additional readings The Economics of Uncertainty and Information K. J. Arrow, Yrjö Jahnsson Lectures: Aspects of The Theory of Risk-Bearing, Helsinki, 1965.

16 M. J. Machina, "Choice Under Uncertainty: Problems Solved and Unsolved," Journal of Economic Perspectives 1(1) (1987), General Equilibrium, Welfare Economics and Resource Allocation 1. Introduction to General Equilibrium Theory and Resource Allocation R. Radford, "The Economic Organization of a POW Camp," Economica 12 (1945), Existence K. J. Arrow and G. Debreu, "Existence of Equilibrium for a Competitive Economy," Econometrica 22 (1954), E. R. Weintraub and T. Gayer, Equilibrium Proofmaking, Journal of the History of Economic Thought 23 (2001), Core Theory G. Debreu and H. Scarf, "A Limit Theorem on the Core of an Economy," International Economic Review 4 (1963), R. Anderson, "An Elementary Core Equivalence Theorem," Econometrica 46 (1978), Aggregate Demand and Uniqueness of Equilibria H. Sonnenschein, "Do Walras' Identity and Continuity Characterize the Class of Community Excess Demand Functions?" Journal of Economic Theory 6 (1973) H. Sonnenschein,"Market Excess Demand Functions"Econometrica 40 (1974) G. Debreu, "Excess Demand Functions," Journal of Mathematical Economics 1 (1974), R. Mantel, "On the Characterization of Aggregate Excess Demand," Journal of Economic Theory 7 (1974) G. Debreu, "Regular Differentiable Economies," American Economic Review 66 (1976), R. Mantel, "Homothetic Preferences and Community Excess Demand Functions," Journal of Economic Theory 12 (1979) A. Kirman and P. Koch, "Market Excess Demand in Exchange Economies with Identical Preferences and Collinear Endowments," Review of Economic Studies (1986), Resource Allocation Mechanisms 1. Introduction to Implementation L. Hurwicz, "The Design of Mechanisms for Resource Allocation," American Economic Review (Papers and Proceedings) 63 (1973), A. Gibbard, "Manipulation of Voting Schemes: A General Result," Econometrica 41 (1973), M. Satterthwaite, "Strategy-Proofness and Arrow's Conditions: Existence and Correspondence Theorems for Voting Procedures and Social Welfare Functions," Journal of Economic Theory 10 (1975), E. Muller and M. Satterthwaite, "Strategy-Proofness: The Existence of Dominant Strategy Mechanisms." Chapter 5 in 2 Hurwicz, Schmeidler and Sonnenschein. D. Schmeidler and H. Sonnenschein, "Two Proofs of the Gibbard-Satterthwaite Theorem on the Possibility of a Strategy-Proof Social Choice Function." In Decision Theory and Social Ethics, H. Gottinger and W. Leinfellner, Eds. Holland: D. Reidel Publishing, J. Moore and R. Repullo, "Implementation by Stage Mechanisms," European Economic Review 31 (1987) J. Moore and R. Repullo, "Nash Implementation: A Full Characterization," Econometrica 58 (1990), J. Moore, "Implementation in Environments with Complete Information." In Advances in Economic Theory, J.-J. Laffont, Ed. Cambridge University Press, 1992.

17 A. Postlewaite, "Implementation via Nash Equilibria in Economic Environments." Chapter 7 in Hurwicz, Schmeidler and Sonnenschein. V. Danilov, "Implementation via Nash Equilibria," Econometrica 60 (1992), T. Yamato, "On Nash Implementation of Social Choice Correspondences," Games and Economic Behavior 4 (1992), E. Maskin, Nash Equilibrium and Welfare Optimality, Review of Economic Studies 66 (1999), Implementation with Incomplete Information R. Myerson, "Incentive Compatibility and the Bargaining Problem," Econometrica 47 (1979), P. Dasgupta, P. Hammond and E. Maskin, "The Implementation of Social Choice Rules: Some Results on Incentive Compatibility," Review of Economic Studies 46 (1979), A. Postlewaite and D. Schmeidler, "Implementation in Differential Information Economics," Journal of Economic Theory 39(1) (1986), T. Palfrey and S. Srivastava, "On Bayesian Implementable Allocations," Review of Economic Studies 54(2) (1987), T. Palfrey and S. Srivastava, "Mechanism Design with Incomplete Information: A Solution to the Implementation Problem," Journal of Political Economy 97 (1989), T. Palfrey and S. Srivastava, "Implementation with Incomplete Information in Exchange Economies," Econometrica 57 (1989), D. Mookherjee and S. Reichelstein, "Implementation via Augmented Revelation Mechanisms," Econometrica 57 (1990), M.O. Jackson, "Bayesian Implementation," Econometrica 59 (1991), H. Haller, Limitations of the Revelation Principle," Economics Letters 39 (1992), Introduction to Auction Theory W. Vickrey, Counterspeculation, Auctions, and Competitive Sealed Tenders, Journal of Finance 16(1) (1961), J. Riley and W. Samuelson, Optimal Auctions, American Economic Review 71 (1981), R. Myerson, Optimal Auction Design, Mathematics of Operations Research 6 (1981), P.R. Milgrom and R. Weber, A Theory of Auctions and Competitive Bidding, Econometrica 50 (1982), E. Maskin and J. Riley, Optimal Auctions with Risk Averse Buyers, Econometrica 52 (1984) P.R. Milgrom Auction Theory, in T.F. Bewley (ed), Advances in Economic Theory, Fifth World Congress, (1987), 1-32, Cambridge University Press, Cambridge. The New Palgrave: Auctions. R. McAfee and J. McMillan, Auctions and Bidding, Journal of Economic Literature 25 (1987), J. Bulow and J. Roberts The Simple Economics of Optimal Auctions, Journal of Political Economy 97 (1989), P.R. Milgrom, Auctions and Bidding: A Primer, Journal of Economic Perspectives 3 (1989), J. Riley, Expected Revenue from Open and Sealed Bid Auctions, Journal of Economic Perspectives 3 (1989), Introduction to Contract Theory: Labor/Agency Contracts Lars Stole's Lectures on the Theory of Contracts: C. Azariadis and J. E. Stiglitz, "Implicit Contracts and Fixed Price Equilibria," Quarterly Journal of Economics 98 (Supplement) (1983), 1-22.

18 C. Azariadis, "Employment with Asymmetric Information," Quarterly Journal of Economics 98 (Supplement) (1983), S. J. Grossman and O. Hart (1983), "Implicit Contracts under Asymmetric Information," Quarterly Journal of Economics 98 (Supplement) (1983), J. Green and C. Kahn, "Wage-Employment Contracts," Quarterly Journal of Economics 98 (Supplement) (1983), C. Kahn and J. Scheinkman, "Optimal Employment Contracts with Bankruptcy Constraints," Journal of Economic Theory 35 (1985), R. E. A. Farmer, "Implicit Contracts with Asymmetric Information and Bankruptcy: The effect of Interest Rates on Layoffs," Review of Economic Studies LII (1985),

19 Class Policies Attendance 1. Excuses for anticipated absences must be cleared with the instructor before the absence. Examples of anticipated situations where a student would qualify for an excused absence are: a. The student is away from campus representing an official university function, e.g., participating in a professional meeting, as part of a judging team, or athletic team. These students would typically be accompanied by a University faculty or staff member. b. Required court attendance as certified by the Clerk of Court. c. Religious observances as verified by Parents & Constituent Services ( ). For more information about a variety of religious observances, visit the Diversity Calendar. d. Required military duty as certified by the student's commanding officer. 2. Excuses for emergency absences must be reported to the instructor as soon as possible, but not more than one week after the return to class. Examples of emergency absences are: a. Illness or injury when certified by an attending physician. Physicians on the Student Health Service staff do not provide written excuses. Because of student confidentiality, information can only be released directly by the Counseling Center or Student Health Services in case of crisis or with the student's written authorization. b. Death or serious illnesses in the family when documented appropriately. An attempt to verify deaths or serious illness will be made by Parents & Constituent Services ( ) at the request of the instructor. For a full statement of the University Attendance Policy, see Disabled Students: In accordance with Section 504 of the Rehabilitation Act of 1973 ( Rehab Act ), the Americans with Disabilities Act of 1990 ( ADA ), and state law, North Carolina State University (hereinafter NC State) is required to accommodate an otherwise qualified individual with a disability by making a reasonable modification in its services, programs, or activities. This regulation addresses the eligibility of students for academic accommodations in educational programs, services, and activities at NC State, as well as the provision of such accommodations to students with various types of disabilities. For a full review of NCSU s policy toward students with disabilities, please see: Academic Integrity/Student Conduct: This course will be held in accordance with the University s academic integrity standards as outlined in the Code of Student Conduct. Please review the Code in its entirety at: