lecture1 - Econ 103C-Lecture 1 Introduction David Sraer...

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Econ 103C-Lecture 1 Introduction David Sraer U.C. Berkeley January 23, 2008 David Sraer (U.C. Berkeley) Econ 103C-Lecture 1 January 23, 2008 1 / 18
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Who are we? David Sraer: Researcher/Lecturer in the Economic Department PhD in Economics from Toulouse (France) Fields of Research: Corporate Finance, Industrial Organization, Firm Organization and Asset Pricing My office: Evans 589. Office Hours: Wednesday 2-4pm. Homepage for the course (subject to change): on Bspace! Juan Carlos Suarez Serrato Your reader! PhD candidate David Sraer (U.C. Berkeley) Econ 103C-Lecture 1 January 23, 2008 2 / 18
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Traditional economic theory relies on strong assumptions Until late 60’s/early 70’s, analysis of consumer and producer behavior, and of general equilibrium in the market, implied very important implicit assumption: Characteristics of commodities traded are known (equally) to all market participants. I When buying a car traded in the market, consumers know exactly how this car is going to contribute to their utility. I When a firm buys labor as an input for production, it perfectly anticipates how the worker is going to contribute to output. I When an airline is selling a seat to a traveler, it knows the demand for a particular kind of ticket at a particular price. These assumptions are required to obtain the welfare theorems in general equilibrium theory (markets are efficient in allocating products). David Sraer (U.C. Berkeley) Econ 103C-Lecture 1 January 23, 2008 3 / 18
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These assumptions are often violated In reality, (1) market participants often have imperfect information about the goods being traded, and (2) this information is held asymmetrically: In the used-car market, the seller of a car may have much better information about her car’s quality than the prospective buyer does. When a firm hires a worker, it may know less than the worker about the worker’s ability. After hiring the worker, it may not be able to observe the worker’s effort. When an airline sells a ticket, it might not know how much a particular consumer is willing to pay for it, while the consumer of course does. What is the reaction of market participants to such asymmetries of information? The answer is in this course! David Sraer (U.C. Berkeley) Econ 103C-Lecture 1 January 23, 2008 4 / 18
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Contract Theory: A Definition Consider a situation where 2 or more individuals can generate a surplus with a transaction (e.g. selling a car/signing an employment contract. . . ). However, some parties in the transaction might have interest to mis-behave (e.g. lying about the car’s performance/surfing the web instead of working). The question is: How can all parties be induced to behave so that the
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This note was uploaded on 08/01/2008 for the course ECON 103C taught by Professor Sraer during the Spring '08 term at University of California, Berkeley.

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lecture1 - Econ 103C-Lecture 1 Introduction David Sraer...

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