This course acquaints students with the theory and methods of information economics. This field of economics analyzes the effects of the distribution of information among economic agents on markets, organizations, and – more generally – on economic decision-making. The course consists of a weekly lecture, a weekly tutorial, and a weekly seminar.
Lecture and tutorial
The lecture provides an overview over central topics in information economics. The lecture is accompanied by a tutorial. In the first part of the lecture, we analyze how asymmetric information among market participants may lead to market failure, and how different institutions such as certificates, warranties, firms, or educational degrees may be understood as solutions that emerge in response to the market inefficiency. The second part of the lecture is about information asymmetry in organizations. In this part, we study models of strategic information transmission within organizations and how contracts or organizational hierarchies can be understood as solutions to the asymmetric allocation of information within the organization.
Part 1: Markets
- Product markets
- Labor markets
- Insurance markets
- Financial markets
- Adverse selection and market failure
- Warranties, certificates, and voluntary disclosure
- Moral hazard and reputation
- Search, monopoly price paradox, and price dispersion
- Monopolistic screening
- Voluntary vs. involuntary unemployment and efficiency wages
- Labor market signaling
- Monopolistic insurance markets
- Competitive insurance markets
- Optimal financial contracts under asymmetric information
- Credit rationing
Part 2: Organizations
- Information asymmetry in organizations
- Agency problem
- Incentives for teams
- Modes of communication: Cheap talk and Bayesian persuasion
- Allocation of authority
The seminar focuses on applications of mechanism design – a subfield of information economics – to applications in auctions, matching markets, and voting rules. The seminar starts with three introductory lectures to mechanism design in general and auctions, matching markets, and voting rules in particular. In the remaining sessions, we discuss research articles from a reading list which is provided in the first seminar session. For each session, a participant picks a paper and leads the discussion on the chosen paper, all participants are required to read the paper before the seminar to ensure a lively discussion. All participants are required to write a term paper (10-15 pp.) which is to be handed in by the end of the semester (March 31, 2023).
Examinations and module
Students of the master programs Economics and Public Economics who study under the regulations of the Prüfungsordnung from May 2022 book the course under the 12-LP-module “Methods in Economic Theory”. These students are only required to write the term paper to be handed in by the end of the semester.
Students of the master programs Economics and Public Economics who study under the older regulations of the Prüfungsordnung from May 2012 book the lecture and the tutorial under the module “Informationsökonomik” and the seminar under the module “Aktuelle Forschungsfragen der Mikroökonomie”. These students are required to write an exam as examination for the module “Informationsökonomik” and the term paper as examination for the module “Aktuelle Forschungsfragen der Mikroökonomie”. Students who have taken the course “Information Economics” in previous semester can participate in the seminar only.
Introductory readings for seminar
Milgrom, Paul. "Auction research evolving: Theorems and market designs." American Economic Review 111.5 (2021): 1383-1405.
Milgrom, Paul, and Ilya Segal. "Designing the US incentive auction." Handbook of Spectrum Auction Design (2017): 803-812.
Roth, Alvin E., and Elliott Peranson. "The redesign of the matching market for American physicians: Some engineering aspects of economic design." American Economic Review 89.4 (1999): 748-780.
Roth, Alvin E. "Repugnance as a Constraint on Markets." Journal of Economic Perspectives 21.3 (2007): 37-58.
Young, Peyton. "Optimal voting rules." Journal of Economic Perspectives 9.1 (1995): 51-64.