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Home , Rachel Croson, Trygve Haavelmo, William Vickrey

COMM 620: Fall 2011 Seminar in Communication

Using Theory to Craft Policies to Affect Change

[Working draft]

Class day/time: Thursdays, 9-11:50 a.m. Classroom: KER202

Instructors:

Professor Lian Jian Professor Jonathan Aronson Office: ASC 227A Office: KER206 E-Mail: [email protected] E-mail: [email protected] Phone: 213 740-0439 Phone: 213 743-1943 Office hours: By appointment Office hours: By appointment

Course Description:

This seminar reviews path-breaking ideas suggested by, mostly, winning . It then examines specific cases, trying to understand the process by which markets and institutions transform these ideas into results. There will be six couplets where we will focus on theory and ideas in the first week and how these ideas were translated into practical results in the second week.

Course policies:

Use of computer in the classroom is a privilege. You may use a computer in the classroom for taking notes or for checking the Internet to augment class discussion in real time. Please do not check your email or surf the Web for non-class related. (We will be watching!) Please turn off all other electronic devices (cell phones, MP3 players, etc.) during class.

Due dates are indicated on the syllabus. You are expected to meet these deadlines. Exceptions will be allowed only if agreed upon by the instructors in advance or in the event of a tsunami or other natural disaster striking LA in the two days before class. Lateness will be penalized in your final grade.

Course Requirements:

A research paper or project is due and will be presented the last day of class. (40%) The topics will be negotiated with the instructors. A two-page proposal is cue in class on September 29th. (10%) PhD students are encouraged to develop a paper for their research project that, after revision, might be published in a scholarly journal or serve as a basis for their dissertation.

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Each of you will also be required write a 4-8 page policy memo that focuses on one economists writings and its ultimate implications for the real-world policy (20%), to lead or help lead a discussion based on the readings in class (15%), and to participate in class discussion. (15%). One extra credit assignment worth 5% is available.

For the policy memo, imagine you are a visiting academic fellow in the office of a high- level business, government, or NGO official. You will need to specify the company or agency, and country. Your boss is overwhelmed by day-to-day decisions and does not have time to read and reflect on the ideas in the academic literature. She has asked you to write her a memo that (1) identifies a real or likely decision that she may soon be faced with, (2) reviews the ideas of one or two Nobel economists whose ideas may provide insight to the looming decision, and (3) recommend a course of action based on the economic insights.

We see the research paper/project as something that should be a steppingstone and not an end product. Doctoral students could focus on producing a paper that they could present at a conference and eventually publish. Or, they could use this project as an exercise/opportunity to develop a dissertation prospectus that you might want to pursue after you pass your qualifying exams. Students who do not see their future in academia or research may wish to develop a “White Paper” or other project that showcases their skills and could be shared with potential employers. In either case, we will work with you individually to develop a project that fits with your interests and goals.

Grading:

Assignment Value Due Date Paper/Project Proposal 10% September 29 Policy Memo 20% October 27 Discussion Section Lead 15% As Assigned Class Participation 15% Throughout Final Paper/Project 40% December 1

Extra Credit 5% September 8

You May Wish to Purchase

North, Douglas. (1990). Institutions, Institutional Change and Economic Performance, Cambridge University Press.

Stiglitz, Joseph. (2002). Globalization and Its Discontents, Norton.

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Yunis, Mohammed (2003). Banker to the Poor: Micro-Lending and the Battle Against World Poverty; Public Affairs, Academic Accommodations/Statement for Students with Disabilities

If you have a recognized disability, we will work with you to make accommodations. You will need to register with Disability Services and Programs (DPS) and obtain a letter of verification for approved accommodations for us, from them by the fourth week of class. DPS is located in STU 301 and is open 8.30 a.m. to 5 p.m. Monday through Friday. The DSP phone number is 213.740.0776. If the pressure grows and you are feeling overwhelmed, talk to us, but also contact the USC Student Counseling Services office at 213-740-7711. The free service is confidential.

Plagiarism/Academic Integrity:

We encourage you to form study groups and will consider group projects, but the Annenberg School for Communication is committed to maintaining the highest standards of ethical conduct and academic excellence. Plagiarism, fabrication, or purchasing papers will be dealt with harshly and may result in you dismissal from Annenberg and USC. (Ironically, if policymakers plagiarize your ideas or prose they will not credit you, but we will)

In addition to the formal academic integrity policy, our pedagogical policy is based on mutual respect; all students are encouraged to use the classroom as a space in which to speak and to voice their opinions. Our expectation is that you will respect not only the professors but also your fellow classmates when they are participating in discussion.

WEEKLY TOPICS AND READINGS

Week 1: (8/25): Introduction to class, syllabus, expectations and goals

Guest speaker: Annenberg Professor Thomas Goodnight

Before class please read:

Stigler, George J. “Does Have a Useful Past?” History of Political , September 1, 1969; 1: 217-230.

Levitt, Steven D. and Stephen Dubner (2005). Freakonomics, William Morrow, pp. 3-15 and if possible 117-144.

Watch: speaks on "The Uses and Abuses of Adam Smith" at Duke University as part of a celebration weekend of the 40th anniversary of the History of Political Economy Journal. Available at: http://www.youtube.com/watch?v=TUPAIdK126s

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Couplet 1: Economic History, Institutions, and Change

Week 2: (9/1): Theory: Economic History and Economics of Information:

Readings: Coase, Ronald. (1937). “The Nature of the Firm,” Economica, 4(16), 386–405.

North, Douglass. (1991). “Institutions,” The Journal of Economic Perspectives, 5(1), 97–112. North, Douglas. (1990). Institutions, Institutional Change and Economic Performance, Cambridge University Press, pp. 3-104.

Hayek, Friedrich A. (1945). The use of knowledge in society. , 35(4), 519-30.

Vane, Howard and Chris Mulhearn (2005) The Nobel Memorial Laureates in Economics, Edward Elgar. (V&M). Bios for Stigler (1982), Coase (1991), North (1993), and Hayek (1974) . (These will be distributed in advance.)

For the mathematically inclined:

Stigler, George. (1961). The Economics of Information. The Journal of Political Economy, 69(3), 213-25.

Week 3: (9/8): Applications: Prediction markets and Internet search

Extra Credit Opportunity: Correctly predict the winner(s) of the 2011 Nobel Prize in Economics. Submit you predictions before the prizewinner is named.

Readings:

Please watch: Douglas North - Effect of Institutions on Market Performance at FCC. Available at: http://www.youtube.com/watch?v=A2xhmlpUKd8

Brynjolfsson, Erik and Michael D Smith. (2000). Frictionless commerce? A comparison of Internet and conventional retailers. Management Science, 46(4), 563-85.

Wolfers, Justin and Eric Zitzewitz. (2003). The furor over “terrorism futures.”. The Washington Post. Available at: http://bpp.wharton.upenn.edu/jwolfers/Press/TerrorismFutures.pdf

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Wolfers, Justin and Eric Zitzewitz. (2009). Using markets to inform policy: The case of the Iraq war. Economica, 76, 225-50.

Please visit these online prediction markets: Hollywood Stock Exchange: http://www.hsx.com/ and Intrade: http://intrade.com

Couplet 2: and

Week 4: (9/15): Theory: Game theory and mechanism design

Readings:

Dutta, Prajit K. (1999). Strategies and Games: theory and practice. MIT Press, Ch. 1, 2, 3, 5, and 20.

Chapter 1: A first look at the applications Chapter 2: A first look at the theory Chapter 3: Strategic form games and dominant strategies Chapter 5: Chapter 20: Games with incomplete information

“Von Neumann’s Games” and Nash’s Equilibrium”, Chapter 2 and 3 in Siegfried, Tom (2006), A Beautiful Math: John Nash, Game Theory and the Modern Quest for a Code of Nature, Joseph Henry Press, pp. 27-72.

Hurwicz, Leonid. (1945). The Theory of Economic Behavior, American Economic Review, 35(5), 909– 925.

V&M Bios of Harsanyi (1994) and Nash (1994)

For the Mathematically Inclined

Harsanyi, John. (1962). Bargaining in ignorance of the opponent's utility function. Journal of Conflict. Resolution, vol. 6, pp. 29-38.

Myerson, Roger B. (2008). "Mechanism design." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, The New Palgrave Dictionary of Economics Online.

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Week 5: (9/22): Applications: Spectrum auctions, school choices, and kidney exchange

Invited guest speaker: Simon Wilkie, USC Department of Economics

Readings:

Please watch: Akerlof-Critique of Neo-Classical Part 1; http://www.youtube.com/watch?v=EO8lwTjtca0&feature=related

Kwerel, Evan (March 11, 2004), Market Mechanisms for Redeveloping Spectrum,” Presentation at Harvard, ppt.

Schelling, Thomas. (1978). Micromotives and Macrobehavior, Norton, pp. 9-43.

Schelling, Thomas. (1960). Elements of a Theory of . The Strategy of Conflict, Oxford, pp. 3-80.

Roth, AlvinE. (2008). What Have We Learned from Market Design? The Economic Journal, 118(March), 285-310.

For the Mathematically Inclined

Milgrom, Paul. (1999). Putting to work: The simultaneous ascending auction. Research Working papers. Milgrom, (2004), Putting Auction Theory to Work, Cambridge University Press. Applications of mechanism design principles in the context auctions.

Terwiesch, Christian and Yi Xu. (2008). Innovation contests, open innovation, and multiagent problem solving. Management Science, 54(9), 1529-43.

Aumann, Robert J. (1976). Agreeing to Disagree. The Annals of Statistics (Institute of Mathematical Statistics) 4(6), 1236–1239.

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Couplet 3: Governance, Regulation and Policy

Week 6: (9/29): Theory: Property Rights and Strategic policy

Readings:

Watch: Amartya Sen, 2nd Annual Arrow Lecture: Social Choice and Individual Values, Respondents Ken Arrow and Eric Mankin, Chair . Sponsored by Committee on Global Thought. Parts 1-3; http://vimeo.com/8260775; http://vimeo.com/8260955.; http://vimeo.com/8260961;

James M. Buchanan, Nobel Prize Lecture, December 1986, “The Constitution of Economic Policy,” Available at: http://nobelprize.org/nobel_prizes/economics/laureates/1986/buchanan-lecture.html

Simon, Herbert A. (1957). Models of Man; social and rational. Wiley. 287 pp. (selected)

Buchanan, James M. and Gordon Tullock (1962) The Calculus of Consent: Logical Foundations of Constitutional Democracy, University of Michigan Press, 384 pp. (selected).

Williamson, Oliver E. (2002). The Theory of the Firm as Governance Structure: From Choice to Contract. Journal of Economic Perspectives 16 (3), 171–195.

V&M Bios for Buchanan (1986) and Simon (1978)

Week 7: (10/6): Applications: Trade Policy

Readings:

Watch: Joseph Stiglitz "Engine for Growth" at FCC; Available at: http://www.youtube.com/watch?v=iN1L2lqE5BY&feature=relmfu

Krugman, Paul. “Introduction: New Thinking about Trade Policy,” in (ed.) Strategic Trade Policy and the New International Economics (MIT Press, 1986), pp. 1-22.

For the Mathematically Inclined

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Krugman, Paul (1979) Increasing returns, monopolistic competition, and international trade. Journal of International Economics, 9, 469–79.

Couplet 4: Commons, Public Goods and Transaction Costs

Week 8: (10/13): Theory: Commons and Public Goods and Governance

Readings:

Please Watch: , Nobel Lecture, 2010, Available at: http://www.ustream.tv/recorded/4777707

Hardin, Garrett. (1968). The . Science, 162(3859), 1243-48.

Crawford, Sue E. S. and Ostrom, Elinor. (September 1995). “A Grammar of Institutions.” American Political Science Review, 89(3), 582–600.

Ostrom, Elinor. (1998) A Behavioral Approach to the Rational Choice Theory of Collective Action: Presidential Address, American Political Science Association, The American Political Science Review, 92(1), 1–22.

Ostrom, Elinor (1990) Governing the Commons: The Evolution of Institutions for Collective Action, Cambridge University Press, 1990. Ch 1, 2, and 3.

Williamson, Oliver E. (1985) The Economic Institutions of Capitalism, Chapter 1, pp. 15-42.

Williamson, Oliver E.. (2000). The New : Taking Stock, Looking Ahead, Journal of Economic Literature, 38(3), 595-613.

V&M Bio Samuelson (1970)

For the Mathematically Inclined

Samuelson, Paul A. (1954). The pure theory of public expenditure. The review of economics and statistics, 36(4), 387-89.

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Week 9: (10/20): Applications: Public radio and user-generated content

Readings:

Benkler, Yochai. (2004). Sharing Nicely: On Shareable Goods and the Emergence of Sharing as a Modality of Economic Production. Yale Law Journal, 114(2), 273- 358.

Jian, Lian and Jeffrey K. MacKie-Mason. (In press). Incentive-Centered Design For User-Contributed Content, The Oxford Handbook of the Digital Economy, edited by M. Peitz and J. Waldfogel.

Shang, Jen and Rachel Croson. (2009). A Field Experiment in Charitable Contribution: The Impact of Social Information on the Voluntary Provision of Public Goods. The Economic Journal, 119(540), 1422-39.

Fehr, Ernst and Simon Gachter. (2002). Altruistic punishment in humans. Nature, 415.

Milinski, Manfred, Dirk Semmann and Hans-Jurgen Krambeck. (2002). Reputation helps solve the 'tragedy of the commons'. Nature, 415.

Chen, Yan, F Maxwell Harper, Joseph Konstan and Sherry Xin Li. (2010). Social comparisons and contributions to online communities: A field experiment on movielens. American Economic Review, 100(4), 1358-98.

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Couplet 5: and Incentives

Week 10: (10/27): Theory: Information Asymmetry and Incentives

Readings:

Stiglitz, Joseph. (1998). Distinguished lecture on economics in government: The private uses of public interests: Incentives and institutions. Journal of Economic Perspectives, 12 (2), 3-22.

Akerlof, George A. (1970). The Market for 'Lemons': Quality Uncertainty and the Market Mechanism. Quarterly Journal of Economics. 84(3), 488–500.

Harford, Tim. (2006). The undercover . Oxford University Press, New York, NY. Chapter 5, “The inside story.” pp 109 -135.

Schultze, Charles L., The Public Use of Private Interest, Brookings, 1977. (perhaps)

Hirschman, Albert. (1970). Exit, Voice, and Loyalty (Harvard, 1970), pp. 1-54.

V&M Bios Akerlof (2001), Spence (2001)

For the Mathematically Inclined

Spence, Michael. (1973). Job Market Signaling. Quarterly Journal of Economics, 87(3), 355–374.

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Week 11: (11/3): Applications: health care, reputation systems and screening

Readings:

Van Alstyne, Marshall W. (2007). Curing spam: Rights, signals & screens. Economists’ Voice.

Wildman, Steven S. (2008). Communication and Economics: Two Imperial Disciplines and Too Little Collaboration. Journal of Communication, 58, 693-706.

Resnick, Paul, Richard Zeckhauser, Eric Friedman and Ko Kuwabara. (2000). Reputation systems. Communications of the ACM, 43(12).

Dellarocas, Chrysanthos. (2003). The digitization of word of mouth: Promise and challenges of online feedback mechanisms. Management Science, 49(10), 1407-24.

Resnick, Paul, Richard Zeckhauser, John Swanson and Kate Lockwood. (2006). The value of reputation on eBay: A controlled experiment. Experimental Economics, 9, 79-101.

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Couplet 6: Welfare Economics and Development

Week 12: (11/10): Theory: Welfare Economics and Development

Readings:

Stiglitz, Joseph. (2002). Globalization and Its Discontents, Norton, pp. 1-88, 166- 252.

Lewis, W. Arthur (1954). Economic Development with Unlimited Supplies of Labor, Manchester School of Economic and Social Studies, 22, 139-91.

V&M Bio: Stiglitz (2001), Lewis (1979).

Week 13: (11/17): Applications: Micro-lending

Readings:

Yunis, Mohammed (2003). Banker to the Poor: Micro-Lending and the Battle Against World Poverty; Public Affairs, pp. 153-232.

Sen, Amartya. Equality of What? The Tanner Lecture on Human Values, Delivered at Stanford University, May 22, 1979. Available at: http://culturability.fondazioneunipolis.org/wp- content/blogs.dir/1/files_mf/1270288635equalityofwhat.pdf

V&M Bio: Sen (1998)

Week 14: (11/24): Thanksgiving break – NO CLASS

Week 15: (12/1): Final presentations

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ADDITIONAL BOOKS, CHAPTERS AND ARTICLES Akerlof George and Rachel Kranton (2010) Identity Economics: How our Identities Shape Our Work, Wages, and Well-Being, Princeton. Arrow Kenneth. Social Choice and Individual Values Coase, Ronald (1974), "The Lighthouse in Economics", Journal of Law and Economics 17 (2): 357–376. Friedman, Milton (1962) Capitalism and Freedom, Press. Krugman, Paul (1991) “Increasing returns and economic geography.” Journal of Political Economy 99, pp. 483–99. Lewis, W. Arthur (2003). The Theory of Economic Growth. Taylor and Francis, 453 pp. Lucas, Robert E. (1981) Rational Expectations and Econometric Practice. Lucas, Robert E. (1987) Models of Business Cycles. Basil Blackwell, 1987. Myerson, Roger "Economic Analysis of Political Institutions: An Introduction," Advances in Economic Theory and : Theory and Applications, volume 1, edited by D. Kreps and K. Wallis (Cambridge University Press, 1997), pages 46–65.

North, Douglass and Robert Thomas (1973) The Rise of the Western World: A New Economic History, Cambridge University Press. North, Douglass (1981) Structure and Change in Economic History, WW Norton. North, Douglass (2005) Understanding the Process of Economic Change, Princeton University Press. Ostrom, Elinor (1990) Governing the Commons: The Evolution of Institutions for Collective Action, Cambridge University Press. Ostrom, Elinor, Roy Gardner, and James Walker, (eds.) (1994) Rules, Games, and Common Pool Resources University of Michigan Press. Ostrom, Elinor (2005) Understanding Institutional Diversity, Princeton. Ostrom, Elinor, with Crawford, Sue E. S., “A Grammar of Institutions.” American Political Science Review 89, no.3 (September 1995): 582–600. Ostrom, Elinor. (1997) A Behavioral Approach to the Rational Choice Theory of Collective Action: Presidential Address, American Political Science Association, The American Political Science Review 92(1): 1–22. 1998. Sen, Amartya (1999) Development as Freedom, Oxford, Oxford University Press. Sen, Amartya: Resources, Values and Development Stiglitz, Joseph (1989), “Principal and agent,” in J. Eatwell, M. Milgate and P. Newman (eds.), The New Palgrave. Allocation, Information and Markets. New York: W. W. Norton Joseph Stiglitz: The Economic Foundations of Intellectual Property; http://www.youtube.com/watch?v=DBmzjZ_hTQo&feature=related

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APPENDIX

Bank of Sweden Prize in Economics in Memory of Alfred Nobel

2011 ????

2010 PETER A. DIAMOND , DALE T. MORTENSEN , and CHRISTOPHER A. PISSARIDES for their analysis of markets with search frictions.

2009 ELINOR OSTROM for her analysis of economic governance, especially the commons OLIVER E. WILLIAMSON for his analysis of economic governance, especially the boundaries of the firm

2008 PAUL KRUGMAN for his analysis of trade patterns and location of economic activity.

2007 , ERIC S. MASKIN , and ROGER B. MYERSON for laying the foundations of mechanism design theory.

2006 EDMUND S. PHELPS for his analysis of inter-temporal tradeoffs in macroeconomic policy.

2005 ROBERT J. AUMANN and THOMAS C. SCHELLING for having enhanced our understanding of conflict and cooperation through game-theory analysis.

2004 FINN E. KYDLAND and EDWARD C. PRESCOTT for their contributions to dynamic macroeconomics: the time consistency of economic policy and the driving forces behind business cycles.

2003 ROBERT F. ENGLE for methods of analyzing economic time series with time-varying volatility ( CLIVE W. J. GRANGER , for methods of analyzing economic time series with common trends (cointegration)

2002 for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty VERNON L. SMITH, for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms

2001 GEORGE A. AKERLOF, A. , and JOSEPH E. STIGLITZ, for their analyses of markets with asymmetric information.

2000 JAMES J. HECKMAN for his development of theory and methods for analyzing selective samples DANIEL L. MCFADDEN for his development of theory and methods for analyzing discrete choice.

1999 ROBERT A. MUNDELL for his analysis of monetary and fiscal policy under different exchange rate regimes and his analysis of optimum currency areas.

1998 AMARTYA SEN for his contributions to welfare economics.

1997 ROBERT C. MERTON and MYRON S. SCHOLES for a new method to determine the value

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1996 JAMES A. MIRRLEES and for their fundamental contributions to the economic theory of incentives under asymmetric information.

1995 ROBERT LUCAS for having developed and applied the hypothesis of rational expectations, and thereby having transformed macroeconomic analysis and deepened our understanding of economic policy.

1994 JOHN C. HARSANYI, JOHN F. NASH, for their analysis of equilibria in the theory of non-cooperative games.

1993 ROBERT W. FOGEL and DOUGLASS C. NORTH for having renewed research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change.

1992 GARY S. BECKER for having extended the domain of microeconomic analysis to a wide range of human behavior and interaction, including nonmarket behavior.

1991 RONALD H. COASE for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy.

1990 HARRY M. MARKOWITZ , MERTON M. MILLER and WILLIAM F. SHARPE for their pioneering work in the theory of financial economics.

1989 for his clarification of the probability theory foundations of econometrics and his analyses of simultaneous economic structures.

1988 for his pioneering contributions to the theory of markets and efficient utilization of resources.

1987 ROBERT M. SOLOW for his contributions to the theory of economic growth.

1986 JAMES M. BUCHANAN, JR. for his development of the contractual and constitutional bases for the theory of economic and political decision-making.

1985 for his pioneering analyses of saving and of financial markets.

1984 SIR for having made fundamental contributions to the development of systems of national accounts and hence greatly improved the basis for empirical economic analysis.

1983 GERARD DEBREU for having incorporated new analytical methods into economic theory and for his rigorous reformulation of the theory of general equilibrium.

1982 GEORGE J. STIGLER for his seminal studies of industrial structures, functioning of markets and causes and effects of public regulation.

1981 for his analysis of financial markets and their relations to expenditure decisions,

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1980 LAWRENCE R. KLEIN for the creation of econometric models and the application to the analysis of economic fluctuations and economic policies.

1979 THEODORE W. SCHULTZ and SIR ARTHUR LEWIS for their pioneering research into economic development research with particular consideration of the problems of developing countries.

1978 HERBERT A. SIMON for his pioneering research into the decision-making process within economic organizations.

1977 and JAMES E MEADE for their path-breaking contribution to the theory of international trade and international capital movements.

1976 for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy.

1975 LEONID VITALIYEVICH KANTOROVICH and TJALLING C. KOOPMANS for their contributions to the theory of optimum allocation of resources.

1974 and FRIEDRICH AUGUST VON HAYEK for their work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena.

1973 for the development of the input-output method and for its application to important economic problems.

1972 SIR JOHN R. HICKS and KENNETH J. ARROW for their pioneering contributions to general economic equilibrium theory and welfare theory.

1971 for his empirically founded interpretation of economic growth, which has led to new and deepened insight into the economic and social structure and process of development.

1970 PAUL A SAMUELSON for the scientific work through which he has developed static and dynamic economic theory and actively contributed to raising the level of analysis in economic science.

1969 and for having developed and applied dynamic models for the analysis of economic processes.

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