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Information Economics INFORMATION ECONOMICS Critical Concepts in Economics Edited by Michael R. Baye and David E. M. Sappington Volume I Foundations of Information Economics Routledge R Taylor & Francis Croup LONDON AND NEW YORK C CONTENTS VOLUME I Contents vii Chronological table of reprinted articles and chapters xv Acknowledgements xx General introduction 1 MICHAEL R. BAYE AND DAVID E. M. SAPFINGTON PARTI Modeling risk, uncertainty, and beliefs 1 The expected-utility hypothesis and the measurability of utility 35 MILTON FRIEDMAN AND L. J. SAVAGE 2 Risk aversion in the small and in the large 50 JOHN W. PRATT 3 Erratum: risk aversion in the small and in the large 67 JOHN W. PRATT 4 Rules for ordering uncertain prospects 68 JOSEF HADAR AND WILLIAM R. RUSSELL 5 Increasing risk: I. a definition 82 MICHAEL ROTHSCHILD AND JOSEPH E. STIGLITZ 6 Prices vs. quantities 102 MARTIN L. WEITZMAN 7 Good news and bad news: representation theorems and applications 123 PAUL R. MILGROM VII CONTENTS 8 Sequential equilibria 138 DAVID M. KREPS AND ROBERT WILSON 9 Signaling games and stable equilibria 174 IN-KOO CHO AND DAVID M. KREPS PART 2 Information and the functioning of markets 10 Counterspeculation, auctions, and competitive sealed tenders 215 WILLIAM VICKREY 11 The economics of information 244 GEORGE J. STIGLER 12 The market for "lemons": quality uncertainty and the market mechanism 262 GEORGE A. AKERLOF 13 The vertical integration of production: market failure considerations 275 OLIVER E. WILLIAMSON 14 Job market signaling 290 MICHAEL SPENCE 15 Equilibrium in competitive insurance markets: an essay on the economics of imperfect information 309 MICHAEL ROTHSCHILD AND JOSEPH STIGLITZ 16 Monopoly and product quality . 329 MICHAEL MUSSA AND SHERWIN ROSEN 17 On the impossibility of informationally efficient markets 346 SANFORD J. GROSSMAN AND JOSEPH E. STIGLITZ 18 The role of market forces in assuring contractual performance 369 BENJAMIN KLEIN AND KEITH B. LEFFLER 19 Credit rationing in markets with imperfect information 394 JOSEPH E. STIGLITZ AND ANDREW WEISS viii CONTENTS VOLUME II Acknowledgements vii PART 3 Contracting with moral hazard 20 Moral hazard and observability 3 BENGT HOLMSTROM 21 Moral hazard in teams 25 BENGT HOLMSTROM 22 The first-order approach to principal-agent problems 48 WILLIAM R ROGERSON 23 Limited liability and incentive contracting with ex-ante action choices 61 ROBERT D. INNES 24 Multitask principal-agent analyses: incentive contracts, asset ownership, and job design 83 BENGT HOLMSTROM AND PAUL R. MILGROM PART 4 Tournaments 25 Rank-order tournaments as optimum labor contracts 115 EDWARD P. LAZEAR AND SHERWIN ROSEN 26 Prizes and incentives: towards a general theory of compensation and competition 139 BARRY J. NALEBUFF AND JOSEPH E. STIGLITZ PART 5 Contracting with adverse selection 27 An exploration in the theory of optimum income taxation 175 J. A. MIRRLEES 28 Using cost observation to regulate firms 220 JEAN-JACQUES LAFFONT AND JEAN TIROLE IX CONTENT.S 29 Countervailing incentives in agency problems TRACY R. LEWIS AND DAVID E. M. SAPPINGTON PART 6 Contractual incompleteness 30 The costs and benefits of ownership: a theory of vertical and lateral integration SANFORD J. GROSSMAN AND OLIVER D. HART 31 Incomplete contracts and strategic ambiguity B. DOUGLAS BERNHEIM AND MICHAEL D. WHINSTON PART 7 Authority and collusion in organizations 32 Hierarchies and bureaucracies: on the role of collusion in organizations JEAN TIROLE 33 Formal and real authority in organizations PHILIPPE AGHION AND JEAN TIROLE PART 8 Contract renegotiation 34 Incomplete contracts and renegotiation OLIVER HART AND JOHN MOORE VOLUME III Contents A cknowledgemen ts PART 9 Auctions 35 Optimal auction design ROGER B. MYERSON 36 Optimal auctions JOHN G. RILEY AND WILLIAM F. SAMUELSON CONTENTS 37 A theory of auctions and competitive bidding 42 PAUL R. MILGROM AND ROBERT J. WEBER 38 Auctions versus negotiations 78 JEREMY BULOW AND PAUL KLEMPERER 39 Internet advertising and the generalized second-price auction: selling billions of dollars worth of keywords 99 BENJAMIN EDELMAN, MICHAEL OSTROVSKY AND MICHAEL SCHWARZ PART 10 Bargaining 40 Incentive compatibility and the bargaining problem 127 ROGER B. MYERSON 41 Efficient mechanisms for bilateral trading 141 ROGER B. MYERSON AND MARK A. SATTERTHWAITE PART 11 Search 42 Economics of information and job search 161 J. J. MCCALL 43 A model of price adjustment 175 PETER A. DIAMOND 44 Searching for the lowest price when the distribution of prices is unknown 187 MICHAEL ROTHSCHILD 45 A simple model of equilibrium price dispersion 211 JENNIFER F. REINGANUM 46 Optimal search 219 PETER MORGAN AND RICHARD MANNING PART 12 The pricing of information 47 Information gatekeepers on the Internet and the competitiveness of homogeneous product markets 247 MICHAEL R. BAYE AND JOHN MORGAN XI CONTENTS PART 13 Advertising and price signaling 48 Advertising as information PHILLIP NELSON 49 Price and advertising signals of product quality PAUL R. MILGROM AND JOHN ROBERTS PART 14 Communication 50 Strategic information transmission VINCENT P. CRAWFORD AND JOEL SOBEL 51 Multiple referrals and multidimensional cheap talk MARCO BATTAGLINI 52 Modes of communication MATHIAS DEWATRIPONT AND JEAN TIROLE VOLUME IV Contents A cknowledgemen ts PART 15 Modeling industry outcomes 53 Supply function equilibria in oligopoly under uncertainty PAUL D. KLEMPERER AND MARGARET A. MEYER 54 Bertrand competition when rivals' costs are unknown DANIEL F. SPULBER PART 16 Collusion 55 A theory of oligopoly GEORGE J. STIGLER xii CONTENTS 56 Rational cooperation in the finitely repeated prisoners' dilemma 78 DAVID M. KREPS, PAUL MILGROM, JOHN ROBERTS, AND ROBERT WILSON 57 Noncooperative collusion under imperfect price information 86 EDWARD J. GREEN AND ROBERT H. PORTER 58 The folk theorem in repeated games with discounting or with incomplete information 102 DREW FUDENBERG AND ERIC MASKIN PART 17 Deterring entry through reputation of limit pricing 59 Reputation and imperfect information 129 DAVID M. KREPS AND ROBERT WILSON 60 Limit pricing and entry under incomplete information: an equilibrium analysis 155 PAUL R. MILGROM AND JOHN ROBERTS 61 Predation, reputation, and entry deterrence 173 PAUL R. MILGROM AND JOHN ROBERTS PART 18 Regulation 62 Regulating a monopolist with unknown costs. 207 DAVID P. BARON AND ROGER B. MYERSON 63 Planning under incomplete information and the ratchet effect 229 XAVIER FREIXAS, ROGER GUESNERIE AND JEAN TIROLE 64 Exclusive dealing, common agency, and multiprincipals incentive theory 252 DAVID MARTIMORT PART 19 Innovation 65 Uncertainty, industrial structure, and the speed of R&D 293 PARTHA DASGUPTA AND JOSEPH E. STIGLITZ 66 Uncertain innovation and the persistence of monopoly 327 JENNIFER F. REINGANUM Xlll CONTENTS PART 20 Commitment 67 Oligopoly and financial structure: the limited liability effect JAMES A. BRANDER AND TRACY R. LEWIS 68 Equilibrium incentives in oligopoly CHAIM FERSHTMAN AND KENNETH L. JUDD 69 Commitment and observability in games KYLE BAGWELL Index xiv .
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