ACE 501
ACE 501 Problem Set 6 due Wednesday, October 30
Carl H. Nelson
1. MWG 14.B.2. Change v1 and v2 to wL and wH .
2. MWG 14.C.7 A good problem of monopoly pricing.
3. MWG 14.C.8 Another good hidden attribute problem.
Fall, 2013
ACE 501
Fall, 2013
ACE 501 Lecture Notes 11/15/13
Carl H. Nelson
1
Decision making under uncertainty Expected
utility
A widely used model of individual decision making under uncertainty is the expected utility model. MWG claim this is because it is easy t
ACE 501
Fall, 2013
ACE 501 Lecture Notes 11/4/13
Carl H. Nelson
1
Will a seller participate in the expected externality mechanism?
Bayesian Nash implementation of a social choice function only asks the questions
When is it possible to design incentivecom
ACE 501
Fall, 2013
ACE 501 Lecture Notes 8/26/13
Carl H. Nelson
1
Information in neoclassical economics
I will use the term neoclassical economics to refer to the subject matter of microeconomic theory that was in large part developed from the early 1930s
ACE 501
Fall, 2013
ACE 501 Lecture Notes 12/02/13
Carl H. Nelson
1
Precautionary Saving, Prudence, and Introduction
to Change in Risk
One behavior under uncertainty that is observed with regularity is the willingness
to save more in the present in respons
ACE 501
Fall, 2013
ACE 501 Lecture Notes 9/30/13
Carl H. Nelson
We will continue our discussion of games of incomplete information by considering the model in chapters 13 and 14 of MWG. These models apply incomplete information to markets and strategic in
ACE 501
Fall, 2013
ACE 501 Lecture Notes 8/28/13
Carl H. Nelson
1
Symmetric games: A Cournot game
We will continue our discussion of Nash equilibrium by first considering symmetric games. These are games where the strategy spaces and payoff functions
of t
ACE 501
Fall, 2013
ACE 501 Lecture Notes 10/21/13
Carl H. Nelson
1
Social choice and efficient resource allocation
One area of mechanism design is concerned with finding optimal mechanisms for
implementing social choices for general groups of agents. To e
ACE 501
Fall, 2013
ACE 501 Lecture Notes 11/18/13
Carl H. Nelson
1
Change in Risk
Rothschild and Stiglitz looked at several definitions of increase in risk that had
appeared in the literature and asked if the definitions were the same or different.
The al
ACE 501
Fall, 2013
ACE 501 Lecture Notes 10/2/13
Carl H. Nelson
Given that incomplete information imposes welfare losses on a market equilibrium relative to full information, we should expect that rational agents will
attempt to find means to mitigate the
ACE 501
Fall, 2013
ACE 501 Lecture Notes 8/30/13
Carl H. Nelson
Problem set 1: Gibbons 1.2, 1.3, 1.4, 1.5, 1.6, 1.7, 1.8; MWG 8.B.1, 8.B.2,
8.B.3 due Monday 9/9
1
Dynamic games of complete information
Since all decisions in static games are made simultane
ACE 501
Fall, 2013
ACE 501 Lecture Notes 9/23/13
Carl H. Nelson
Problem set 4 (Due W 10/1/13): MWG 8.E.1; G 3.2; G 3.4; G 3.5; G 3.8;
and the following: Two firms simulataneously decide whether to enter a market. Firm is entry cost is i [0, ]. The two fir
ACE 501
Fall, 2013
ACE 501 Lecture Notes 9/25/13
Carl H. Nelson
1
Auctions  an important class of static games of
incomplete information
In the last twentyfive years economists have made significant progress analyzing
and designing auctions. In a recent

CHAPTER 3
The theory of contracts
Oliver Hart and Bengt Holmstrom
lntroduction
The past decade has witnessed a growing interest in contract theories of
various kinds. This development is partly a reaction to our rather thorough understanding of the stan
ACE 501
Fall, 2013
ACE 501 Lecture Notes 9/18/13
Carl H. Nelson
1
Random variables, and probability distributions
The next game theory topic we will consider is Static games of incomplete information. We will see that the standard model of incomplete info
ACE 501
Fall, 2013
ACE 501 Lecture Notes 9/16/13
Carl H. Nelson
1
1.1
A Transition to Incomplete Information Sequential Bargaining
Finite Horizon Bargaining
Sequential bargaining is a dynamic version of the dictator game, which is a variant
of the ultimat
ACE 501
Fall, 2013
ACE 501 Problem Set 8 Due 12/4/13
Add MWG pp.687693 to the syllabus readings
1. Consider an agent with initial wealth w0 . He can invest a part A or a proportion a in a risk asset, yielding an uncertain return r. Thus he can final
wealt
ACE 501
Fall, 2013
Comments on Gibbons problem 2.1 The Rotten Kid Theorem
Carl H. Nelson
1
9/16/13
The Rotten Kid Theorem
The Rotten Kid Theorem that you proved in problem set 2 is an important insight in family economics and incentive theory that was fir
ACE 501
Fall, 2013
ACE 501 Lecture Notes 9/11/13
Carl H. Nelson
Problem set 3: Gibbons 2.11,2.13,2.15; MWG 9.B.9, due Friday 9/20
1
Repeated Games
A special class of dynamic games of complete information that are solved with
subgame perfection are repeat
ACE 501
Fall, 2013
ACE 501 Lecture Notes 10/14/13
Carl H. Nelson
Problem set 5, due Wednesday, 10/23
1. MWG 13.B.3, the labor market with a different formulation of reservation
wage, r()
2. MWG 13.B.4, follow the hint and use the action space Trade, No Tr
ACE 501
Fall, 2013
ACE 501 Lecture Notes 9/4/13
Carl H. Nelson
Problem set 2: Gibbons 2.1,2.4,2.6; MWG 8.D.9, 9.B.3, due Monday 9/16
1
Imperfect information
The following extensive form representation of a game can be used to discuss the
distinction betwe
ACE 501
Fall, 2013
ACE 501 Lecture Notes 12/9/13
Carl H. Nelson
1
1.1
Cheap talk a dynamic game of incomplete information
Introduction
Cheap Talk Games are a class of games where the sender sends a message that has
no direct cost. The signal is some messa
ACE 501
Fall, 2013
ACE 501 Lecture Notes 10/9/13
Carl H. Nelson
1
Asymmetric information hidden actions (moral
hazard)
The next model we will consider is probably the most destructive model that has
ever been introduced into economics. It is also one of t
ACE 501
Fall, 2013
ACE 501 Lecture Notes 10/30/13
Carl H. Nelson
Problem set 7 (Due Monday 11/11): MWG 23.B.2; 23.C.10; 23.D.1; 23.D.2;
23.F.2
1
Implementation in Bayesian Nash equilibrium
Recall that dominant strategy implementation requires:
ui (f (i ,
ACE 501
Fall, 2013
ACE 501 Lecture Notes 11/11/13
Carl H. Nelson
1
Optimal Bayesian Mechanisms
MWG structure chapter 23 by first presenting mechanism implementation which
is equivalent to incentive compatibility. The revelation principle is central to thi
ACE 501
Fall, 2013
ACE 501 Lecture Notes 10/21/13
Carl H. Nelson
1
1.1
Asymmetric information, and optimal contracting
A continuum of types
In order to obtain qualitative results from algebraic analysis of a model of optimal
contracting under incomplete i
ACE 501
Fall, 2013
ACE 501 Lecture Notes 10/7/13
Carl H. Nelson
1
The Revelation Principle
Roger Myerson introduced the revelation principle in a 1979 article in Econometrica entitled Incentive Compatibility and the Bargaining Problem. The problem
address
ACE 501
Fall, 2013
ACE 501 Lecture Notes 10/16/13
Carl H. Nelson
1
Mechanism design unknown type and productive action
The signaling model and the screening model have the unrealistic attribute that
the education attained by or task assigned to the worker
ACE 501
Fall, 2013
ACE 501 Lecture Notes 9/9/13
Carl H. Nelson
Banks provide liquidity through demand deposits. In this threeperiod model
a demand deposit returns r1 units to agents withdrawing in time period 1. The
essential economic attribute of demand
ACE 501
Fall, 2008
ACE 501 Practice Exam 1 Questions 10/8/08
1. Consider a village of I farmers who raise cows for milk production. Property rights are not defined in the village so the grazing area for the cows is
common property. Let ni represent the nu