This course will expose students to topics in modern economic theory at an advanced undergraduate level, focusing in particular on game theory and information economics. The course begins with a short critical review of the main assumptions and principal mathematical methods used in traditional general equilibrium analysis of markets. Game theory and information economics are then introduced as frameworks for understanding behavior in a broad class of situations where the assumptions of the traditional approach are relaxed.
Game theory studies strategic interaction in a wide variety of contexts.
Applications include firm behavior in concentrated or oligopolistic markets, the free rider problem or the conditions for the emergence of trust and cooperation in organizations and partnerships, bargaining, and other social situations where individually rational behavior can lead to multiple and socially inefficient outcomes. Information economics and mechanism design theory extend game theory by asking how changing the rules of a game affect equilibrium outcomes, and therefore the question of how people might choose to set up the rules that organize their interactions. Important insights emerge for understanding a broad class of situations where information is asymmetrically held and where property rights may be contestable. Questions that can be addressed include the design of compensation and incentive contracts, why insurance contracts specify deductibles and why so many people go uninsured in our society, how large firms choose their financial structure and why small firms are often credit rationed, and more generally the question of why firms, bureaucracies, and households exist and appear to be organized as they are.