The course is divided into three parts, each of which is preparatory to the next. The first part provides an introduction to the theory of choice under uncertainty, explaining common risk assessment methods and the basic principles of investing in assets with uncertain returns and insurance. The second part proposes the basic notions of game theory and studies strategic interaction in static and dynamic contexts, even in the presence of incomplete information, developing an extensive digression on auction mechanisms. The third part introduces more properly the theory of information asymmetries, investigating the phenomena of adverse selection, contractual failures due to opportunistic behaviour, and selection and signalling mechanisms aimed at reducing the effects of information asymmetries. The main techniques of price discrimination and other commercial strategies will be presented.
teacher profile teaching materials
1. Individual decisions Decisioni individuali
• Consumer theory (preferences, utility functions, balance constraint, demand curve, individual welfare).
• Producer theory (technology, cost function, profit maximization, supply function).
• “Big data” and individual decisions: learning about individual characteristics from their choices.
2. "Perfectly competitive" markets: equilibrium, efficiency, equity.
• Single market equilibrium
• General equilibrium, efficiency and equity.
• Information revealed by prices.
Parte II - Choices and transactions under imperfect information
1. Choice under uncertainty. Uncertainty and risk. Lotteries. Expected utility. Attitudes toward. Certainty equivalence and risk premia. Decisions under uncertainty and risk. The importance of risk diversification:
demand of financial assets and insurance. The value of information.
2. Choice under incomplete information: strategic interactions. Game theory. One-stage games. Nash equilibrium. Dynamic games. Backward induction and "sequentially rational" NE. Cooperation and mutual agreements.
Giochi con incertezza.
3. Incomplete information and market power
• Monopoly. Information and firm policies.
• Oligopoly. Models of price competition (Bertrand-Nash). Models of quantitative competition (Cournot-Nash). Collusion. Barriers to entry and monopolistic competition.
Parte III - Choices and "contracts" under information asymmetries.
1. Information asymmetries on the characteristics of the commodities. Adverse selection. Signaling and screening. Price discrimination through menus of contracts.
2. Information asymmetries on actions; moral hazard and contracts.
Part I - Economic decisions
1. Economic decisions with perfect information (recalls). Classical consumer theory (preferences, utility, budget constraint, demand curve, individual welfare). “Big data” and classical consumer theory:
the “revealed preferences”.
2. Economic decisions with imperfect information. 2.1) Decisions with uncertainty. Uncertainty and risk. Lotteries. Preferences and expected utility. Risk aversion. Certainty equivalent and risk premium. Decisions in presence
of uncertainty and risk. Application for financial and insurance activities. 2.2) Decisions with incomplete information: strategic behaviors. Game Theory. Strategies in one-stage (static) and multi-stage games
(dynamic). Balance concepts. Credible cooperation, commitments, agreements and rules. You play with uncertainty.
Part II - The market
1. Perfectly competitive markets, efficiency and fairness.
2. Monopoly. Nature and implications of the monopoly on efficiency and well-being.
3. Oligopoly. Price competition and Bertrand-Nash equilibria; competition on production capacity and Cournot-Nash equilibria. Efficiency considerations. Collusion.
4. The importance of barriers to entry and monopolistic competition.
5. Markets with asymmetric information. Information asymmetry on characteristics. Adverse selection. Contracts and signaling mechanisms (signaling). Contracts and sorting mechanisms (screening). Discrimination of
price based on self-selection. Information asymmetry on actions, unfair behavior (moral hazard) and contractual solutions.
Additional material will be distributed through the Moodle platform during classes.
Programme
Parte I – The textbook economy with "perfect competition": old concepts and new insights1. Individual decisions Decisioni individuali
• Consumer theory (preferences, utility functions, balance constraint, demand curve, individual welfare).
• Producer theory (technology, cost function, profit maximization, supply function).
• “Big data” and individual decisions: learning about individual characteristics from their choices.
2. "Perfectly competitive" markets: equilibrium, efficiency, equity.
• Single market equilibrium
• General equilibrium, efficiency and equity.
• Information revealed by prices.
Parte II - Choices and transactions under imperfect information
1. Choice under uncertainty. Uncertainty and risk. Lotteries. Expected utility. Attitudes toward. Certainty equivalence and risk premia. Decisions under uncertainty and risk. The importance of risk diversification:
demand of financial assets and insurance. The value of information.
2. Choice under incomplete information: strategic interactions. Game theory. One-stage games. Nash equilibrium. Dynamic games. Backward induction and "sequentially rational" NE. Cooperation and mutual agreements.
Giochi con incertezza.
3. Incomplete information and market power
• Monopoly. Information and firm policies.
• Oligopoly. Models of price competition (Bertrand-Nash). Models of quantitative competition (Cournot-Nash). Collusion. Barriers to entry and monopolistic competition.
Parte III - Choices and "contracts" under information asymmetries.
1. Information asymmetries on the characteristics of the commodities. Adverse selection. Signaling and screening. Price discrimination through menus of contracts.
2. Information asymmetries on actions; moral hazard and contracts.
Part I - Economic decisions
1. Economic decisions with perfect information (recalls). Classical consumer theory (preferences, utility, budget constraint, demand curve, individual welfare). “Big data” and classical consumer theory:
the “revealed preferences”.
2. Economic decisions with imperfect information. 2.1) Decisions with uncertainty. Uncertainty and risk. Lotteries. Preferences and expected utility. Risk aversion. Certainty equivalent and risk premium. Decisions in presence
of uncertainty and risk. Application for financial and insurance activities. 2.2) Decisions with incomplete information: strategic behaviors. Game Theory. Strategies in one-stage (static) and multi-stage games
(dynamic). Balance concepts. Credible cooperation, commitments, agreements and rules. You play with uncertainty.
Part II - The market
1. Perfectly competitive markets, efficiency and fairness.
2. Monopoly. Nature and implications of the monopoly on efficiency and well-being.
3. Oligopoly. Price competition and Bertrand-Nash equilibria; competition on production capacity and Cournot-Nash equilibria. Efficiency considerations. Collusion.
4. The importance of barriers to entry and monopolistic competition.
5. Markets with asymmetric information. Information asymmetry on characteristics. Adverse selection. Contracts and signaling mechanisms (signaling). Contracts and sorting mechanisms (screening). Discrimination of
price based on self-selection. Information asymmetry on actions, unfair behavior (moral hazard) and contractual solutions.
Core Documentation
B. Douglas Bernheim, Michael D. Whinston, Microeconomia, Mc Graw Hill, 2022.Additional material will be distributed through the Moodle platform during classes.
Type of delivery of the course
Class lecturesType of evaluation
A final, written exam, to be taken in class.