ECONOMICS, UNCERTAINTY AND INFORMATION
ECONOMICS, UNCERTAINTY AND INFORMATION
Daniela Teresa Di Cagno
Daniela Teresa Di Cagno
ddicagno@luiss.it
Instructional goals
Aim of the course is furnish the basic tools of mainstream and behavioral economics to analyze problems of individual and strategic decision making, under uncertainty and under incomplete and imperfect information, with particular focus on financial markets.
Intended learning outcomes
KNOWLEDGE AND UNDERSTANDING: The student will be able to analyze and understand the main phenomena described and analyzed during the course, in relation to the behavior of individual economic agents and the economic mechanisms of exchange.
APPLYING KNOWLEDGE AND UNDERSTANDING: At the end of the course, the student must be able to use the tools of theoretical analysis for an advanced understanding of uncertainty and information phenomena.
MAKING JUDGEMENTS: The student will acquire the ability to judge in an autonomous way the individual decision making in relation to specific applications of uncertainty and information.
COMMUNICATION SKILLS: The student will acquire the specific language of microeconomics of uncertainty and information in order to communicate precisely the concepts learned.
LEARNING SKILLS: The student will learn the methodology of analysis of the main problems related to the discussed issues.
Course Contents
Individual decision making under static and dynamic uncertainty; strategic uncertainty in mainstream and behavioral game theory. Market decision making: when to sell and to buy under different market institutions. price and belief formation mechanisms. Efficient market hypothesis, market microstructure and behavioral finance.
Contract theory. Financial negotiations under asymmetric information problems (moral hazard, adverse selection, signalling). Positive and normative analysis.
Reference Books
Lecture notes and material supplied by the instructor (presentations and articles available on the webpage).
Selected topics from:
Paiardini P., Microstruttura dei mercati finanziari, Giappichelli, 2020.
R. Gibbons, Teoria dei giochi, il Mulino, ultima edizione.
Colin F. Camerer.
Behavioral Game Theory: Experiments in Strategic Interaction,
2003.
Charles Holt, Markets, Games and Strategic Behavior: An Introduction to Experimental Economics, 2nd edition, 2020
A. Shleifer, Inefficient Markets- An Introduction to Behavioral Finance, Oxford University Press, 2000.
Per la parte su teoria dei contratti:
Macho-Stadler I. and D. Perez-Castrillo, Introduction to Economics of Information, Oxford University Press.
Teaching Methods
Lectures, practice classes and group presentations.
Assessment Method
Written exam.
Thesis assignment criteria
Passed the exam.
Week 1 Contenuto sessioni on line e on campus
Static and dynamic choices under risk and uncertainty: the mainstream approach.
Theory on web and group work and exercises on campus. Experiments on EUT and discounted utility function.
Week 2 Contenuto sessioni on line e on campus
Static and dynamic choices under risk and uncertainty: alternative theories.Experiments with Marshack- Machina triangle.
Week 3 Contenuto sessioni on line e on campus
Game theory: Nash equilibria and possible violations.
Theory on web and group work and exercises on campus; DG,UG and PG experiments.
Week 4 Contenuto sessioni on line e on campus
Behavioral game theory.
Theory on web and group work and exercises on campus. Psycological experiments on anger, guilt and envy.
Week 5 Contenuto sessioni on line e on campus
Market microstructure.
Theory on web and group work and exercises on campus. Experiments on the efficiency of different market institutions.
Week 6 Contenuto sessioni on line e on campus
Efficient market hypothesis and behavioral finance. Failures of Bayesian updating.
Week 7 Contenuto sessioni on line e on campus
Theory on web and group work and exercises on campus. Experiments on herding, bank runs, market frenzies and crashes.
Week 8 Contenuto sessioni on line e on campus
Introduction to contract theory. Games and contracts. Theory of extensive form games, with complete and with incomplete information.
Week 9 Contenuto sessioni on line e on campus
Contractual arrangements under symmetric information, Pareto efficient allocations in the Edgeworth box. Agency Theory: the moral hazard problem.
Week 10 Contenuto sessioni on line e on campus
Applications of contract theory to corporate finance issues, and to the relationship between firms and financial intermediaries. Credit rationing.
Week 11 Contenuto sessioni on line e on campus
Principal-agent model with with incomplete information. Adverse selection problem, the basic insurance market case. The trade-off between information and efficiency.
Week 12 Contenuto sessioni on line e on campus
Application of the adverse selection model: regulating a monopolistic firm. Exercises.