Advanced Microeconomics Theory II (GM0730)

Updated: 24/02/2020

Description: Three lectures covering the topics on behavior economics (L3), market design (L4), and moral hazard (L15) and two tutorials on related problem sets. We will cover a core topic of standard micro theory, i.e. moral hazard, where one side of the transaction make actions that are relevant to the other side but are difficult to observe. We will also go through two actively researched topics. In behavior economics we will study systematic departures from standard micro theory that is based on the assumption of rationality. In market design, we will study how to allocate scared resource through non-price as well as price-based mechanisms.

Prerequisites: Constrained optimization, basic calculus and topology on sets.

Problem sets: There will be 3 problem sets for each lecture. You can work in groups.

Reference: Books or articles marked with * are important references for the course. For the rest of the readings, you are encouraged to read them or skim through before the class.

L3 Behavioral economics

Textbooks:

Edward Cartwright. Behavioral Economics. London, Routledge, 2nd ed., 2014

More technical survey:

Handbook of Behavioral Economics - Foundations and Applications 1, Volume 1 and 2, North Holland, 1st edition, 2019. (Full online text on the library website)

Articles:

Ausubel, L. M. (1999). Adverse selection in the credit card market. working paper, University of Maryland.

Cronqvist, H., & Thaler, R. H. (2004). Design choices in privatized social-security systems: Learning from the Swedish experience. American Economic Review, 94(2), 424-428.

* DellaVigna, Stefano. “Psychology and Economics: Evidence from the Field,” Journal of Economic Literature, 47 (2009), 315-372

Ellison, Glenn. (2006). “Bounded Rationality in Industrial Organization,” in R. Blundell, W.K. Newey and T. Persson (eds.), Advances in Economics and Econometrics: Theory and Applications, Ninth World Congress, Cambridge University Press.

*Ernst Fehr, Georg Kirchsteiger and Arno Riedl (1993). Does Fairness Prevent Market Clearing? An Experimental Investigation. The Quarterly Journal of Economics. Vol. 108, No. 2 (May, 1993), pp. 437-459

Forsythe, R., Horowitz, J. L., Savin, N. E., & Sefton, M. (1994). Fairness in simple bargaining experiments. Games and Economic behavior, 6(3), 347-369.

Laibson, D. (1997). Golden eggs and hyperbolic discounting. The Quarterly Journal of Economics, 112(2), 443-478.

Nagel, Rosemarie. (1995) "Unravelling in guessing games: An experimental study." The American Economic Review, 1313-1326.

O'Donoghue, T., & Rabin, M. (1999). Doing it now or later. American Economic Review, 89(1), 103-124.

Rubinstein, A. (1998). “Modelling Bounded Rationality”. The MIT Press, Cambridge, MA.

Rabin, Matthew. (1998) "Psychology and economics." Journal of economic literature, 11-46.

Rabin, Matthew. (2002) "A Perspective on Psychology and Economics," European Economic Review 657-685.

Rabin, M. and Weizsacker, G., 2009. Narrow bracketing and dominated choices. American Economic Review, 99(4), pp.1508-43.

L4 Market design

Text books and books:

*Haeringer, Guillaume. Market design: Auctions and Matching. MIT Press, 2018.

Roth, Alvin E. (2015). Who Gets What—and Why: The New Economics of Matchmaking and Market Design. Houghton Mifflin Harcourt.

Milgrom, Paul (2004): Putting Auction Theory to Work. Churchill Lectures, Cambridge University Press.

Roth, Alvin E. and Marilda Sotomayor (1990): Two-Sided Matching: A Study in Game Theoretic Modelling and Analysis. Econometric Society Monograph Series, Cambridge University Press (classic textbook for those who are interested in a more rigorous mathematical treatment of the topic. Chapter 1 - 5).

Background articles:

Gale, David and Lloyd Shapley (1962): “College Admissions and the Stability of Marriage.” American Mathematical Monthly, 69: 9-15.

Roth, Alvin E. (2002) “The Economist as Engineer: Game Theory, Experimental Economics and Computation as Tools of Design Economics,” Econometrica, 70:4, 1341–1378.

Roth, A. E. (2008). What have we learned from market design? The Economic Journal, 118(527), 285-310.

Li Shengwu. Obviously strategy-proof mechanisms. American Economic Review, 107: 3257– 3287, 2018.

Articles by topics:

I. School choice

Abdulkadiroglu, Atila and Tayfun Sönmez (2003): “School Choice: A Mechanism Design Approach.” American Economic Review, 93: 729-747

**Abdulkadiroglu, Atila, Parag Pathak, and Alvin E. Roth (2009): “Strategy-proofness vs. Efficiency in Matching with Indifferences: Redesigning the NYC Match.” American Economic Review, 99(5): 1954-1978.

**Chen, Yan, and Tayfun Sönmez. "School choice: an experimental study." Journal of Economic theory 127.1 (2006): 202-231.

Abdulkadiroglu, Atila, Yeon-Koo Che, and Yosuke Yasuda (2011): “Resolving Conflicting Preferences in School Choice: the Boston Mechanism Reconsidered.” American Economic Review, 101(1): 399-410.

Caterina Calsamiglia and Maia Güell. “The illusion of school choice: Empirical evidence from Barcelona”. CEPR Discussion Paper No. DP10011, 2014.

Dur, U., Kominers, S. D., Pathak, P., & Sönmez, T. (2017). Reserve Design: Unintended Consequences and The Demise of Boston’s Walk Zones. Journal of Political Economy. Forthcoming.

Ergin, Haluk, and Tayfun Sönmez (2006): "Games of school choice under the Boston mechanism." Journal of public Economics, 90, no. 1-2): 215-237.

Pathak, Parag and Tayfun Sönmez (2008): “Leveling the Playing Field: Sincere and Sophisticated Players in the Boston Mechanism.” American Economic Review, 98(4): 1636-1652.

II. Organ allocations

** Roth, Alvin E., Tayfun Sönmez and M. Utku Ünver (2003): “Kidney Exchange.” Quarterly Journal of Economics, 119, 457-488.

** Andersson Tommy, Kratz Jörgen, Pairwise Kidney Exchange over the Blood Group Barrier, The Review of Economic Studies, 2019

Itai Ashlagi and Alvin E. Roth. New challenges in multihospital kidney exchange. American Economic Review, 102:354–359, 2012.

Mohammad Akbarpour, Shengwu Li, and Shayan Oveis Gharan. Thickness and information in dynamic matching markets. Journal of Political Economy, forthcoming.

III. Entry-level labour markets

** Roth, Alvin E. The evolution of the labor market for medical interns and residents: A case study in game theory. Journal of Political Economy, 92:991–1016, 1984.

** Sönmez, Tayfun and Tobias Switzer (2013): “Matching with (Branch-of-Choice) Contracts at the United States Military Academy.” Econometrica, 81(2): 451-488. Avery, Christopher, Christine Jolls, Richard A. Posner, and Alvin E. Roth. "The New Market for Federal Judicial Law Clerks." University of Chicago Law Review 74 (spring 2007): 447–486.

Roth, Alvin E. and X. Xing (1994): “Jumping the Gun: Imperfections and Institutions Related to the Timing of Market Transactions.” American Economic Review, 84, 992-1044.

IV. Financial markets

** Budish, Eric, Peter Cramton, and John Shim. "The high-frequency trading arms race: Frequent batch auctions as a market design response." The Quarterly Journal of Economics 130.4 (2015): 1547-1621.

** Huberman, Gur, Jacob Leshno, and Ciamac C. Moallemi. "An economic analysis of the bitcoin payment system." Columbia Business School Research Paper 17-92 (2019).

Budish, Eric. The economic limits of bitcoin and the blockchain. No. w24717. National Bureau of Economic Research, 2018.

LESHNO, JACOB. "Cryptocurrencies as Marketplaces." Frontiers of Engineering: Reports on Leading-Edge Engineering from the 2019 Symposium. National Academies Press, 2020.

V. Food supply, pseudo-markets ** Prendergast, Canice. "How food banks use markets to feed the poor." Journal of Economic Perspectives 31.4 (2017): 145-62.

Ian A. Kash, Eric J. Friedman, and Joseph Y. Halpern. Optimizing scrip systems: crashes, altruists, hoarders, sybils and collusion. Distributed Computing, 25:335–357, 2012.

Eric Budish. The combinatorial assignment problem: Approximate competitive equilibrium from equal incomes. Journal of Political Economy, 119:1061–1103, 2011.

Eric Budish and Estelle Cantillon. The multi-unit assignment problem: Theory and evidence from course allocation at Harvard. American Economic Review, 102:2237–2271, 2012.

VI. Refugee matching, immigration

Will Jones and Alexander Teytelboym. “The Local Refugee Match: Aligning refugees’ preferences with the capacities and priorities of localities”. Journal of Refugee Studies, 31: 152– 178, 2017a.

Olof Åslund and Dan-Olof Rooth. “Do when and where matter? Initial labour market conditions and immigrant earnings”. Economic Journal, 117:422–448, 2007.

** Trapp, A. C., Teytelboym, A., Martinello, A., Andersson, T., & Ahani, N. (2018). “Placement optimization in refugee resettlement”, Working paper, No. 2018: 23.

Pathak, Parag A., Alex Rees-Jones, and Tayfun Sönmez. Immigration Lottery Design: Engineered and Coincidental Consequences of H-1B Reforms. No. w26767. National Bureau of Economic Research, 2020.

L15 Moral Hazard

Text books:

Intuitive introduction:

Hal Varian. Intermediate Microeconomics: A Modern Approach. W. W. Norton & Company (Chapter 37)

More technical:

* Bolton, Patrick, and Mathias Dewatripont. Contract theory.,MIT press, 2005, 1990. (Chapter 4)

* Laffont, Jean-Jacques, and David Martimort. The theory of incentives: the principal-agent model, Princeton University press, 2009. (Chapter 4 - 5) Salanié, Bernard, 1997. The Economics of Contracts, Cambridge, MA: MIT-Press. (Chapter 5 for moral hazard, and Chapter 8 for a discussion on empirical testing).

Articles:

Arrow, Kenneth J. 1963. Uncertainty and the Welfare Economics of Medical Care. American Economic Review, 53(5): 941-973.

Arrow, Kenneth J. 1968. The Economics of Moral Hazard: Further Comment. American Economic Review, 58(3): 537-539.

Einav, Liran, and Amy Finkelstein. "Moral hazard in health insurance: What we know and how we know it." Journal of the European Economic Association 16, no. 4 (2018): 957-982.

Einav, Liran, Amy Finkelstein, Stephen P. Ryan, Paul Schrimpf, and Mark R. Cullen. "Selection on moral hazard in health insurance." American Economic Review 103, no. 1 (2013): 178-219.

Jackson, C. Kirabo, and Henry S. Schneider. "Do social connections reduce moral hazard? Evidence from the New York City taxi industry." American Economic Journal: Applied Economics 3, no. 3 (2011): 244-67.

Grossman, Sanford J., and Oliver D. Hart. "An analysis of the principal-agent problem." In Foundations of Insurance Economics, pp. 302-340. Springer, Dordrecht, 1992.

Mirrlees, James A. "The theory of moral hazard and unobservable behaviour: Part I." The Review of Economic Studies 66, no. 1 (1999): 3-21.

Pauly, Mark V. 1968. The Economics of Moral Hazard: Comment. American Economic Review, 58(3): 531-537.

Raff, Daniel MG, and Lawrence H. Summers. "Did Henry Ford pay efficiency wages?" Journal of Labor Economics 5.4, Part 2 (1987): S57-S86.

*Rothschild, Michael, and Joseph Stiglitz. "Equilibrium in competitive insurance markets: An essay on the economics of imperfect information." In Uncertainty in economics, pp. 257-280. Academic Press, 1978.

Shapiro, Carl, and Joseph E. Stiglitz. "Equilibrium unemployment as a worker discipline device." The American Economic Review 74, no. 3 (1984): 433-444. Stiglitz, Joseph E. "Incentives and risk sharing in sharecropping." The Review of Economic Studies 41, no. 2 (1974): 219-255.