ECON3016: Economics of Information

University College London

Department of Economics

Lecturer:

Dr. Konrad Mierendorff

Aims:
One often encounters situations in which two agents are involved in a mutual
agreement. Invariably, one economic agent has more information about a characteristic
that is relevant to the agreement, than the other. In this course, we will study how
agents deal with this information asymmetry by designing incentives and embedding
them in contracts. We will also study the effects of information asymmetry on the
prevailing market equilibrium. Applications of the theory include insurance, labour
economics, industrial economics, development, and environmental economics.
Suitable for:

3rd year Economics (L100), Phil/Econ (VL51), Math/Econ (G1L1/G1LC) and

Econ/Stats (LG13) students.
Prerequisites:
Econ2001: Microeconomics, and B2007: Quantitative Economics and Econometrics.
Evaluation:
The material covered in the lectures will be evaluated in a 2-hour written examination in
Term 3. This will be unseen by students until the designated time of the examination.
A sample exam is posted in the course webpage.
Bibliography
Bolton, P. and Dewatripont, M. Contract Theory The MIT Press, 2005
Macho-Stadler, I. and Prez-Castrillo, J.D. An Introduction to the Economics of
Information. Incentives and Contracts. Oxford University Press. 2001. Second edition
Salanie, B. The Economics of Contracts MIT Press, 2005, Second edition

The book by Macho-Stadler and Prez-Castrillo will be the basic one for the course.
The book by Salanie will be used for some parts of the syllabus. The book by Bolton
and Dewatripont is the most advanced of the three. Chapter 7 of the syllabus will be
based on papers and articles. The list will be provided later in the term. The first lecture
will be devoted to review the theory of decision under uncertainty. Most intermediate
microeconomics books will be useful for this review.

Topics covered:
1) Introduction
a) Presentation and overview of the course
b) The elements of the problem
c) The types of asymmetric information
2) Review of the theory of choice under uncertainty
3) The basic principal agent model
a) Description of the model
b) Symmetric information contracts
i)

The optimal payment mechanism

ii) The optimal level of effort

4) The moral hazard problem
a) The case when the agent chooses between two effort levels
b) Continuous effort
c) Applications
5) The adverse selection problem
a) A model for one principal and one agent
b) When principals compete for agents
c) Applications
6) An Introduction to Signalling. Education as a signal
7) Empirical relevance of incentives and information asymmetry
a) Cases in Development Economics
b) Cases in Health Economics and Insurance

Reading list:
For topics 1 to 6, Macho-Stadler, and Prez-Castrillo (2001) is the basic reading.
For the 7th topic, the reading list is:

Ashraf, Nava, Oriana Bandiera, and Kelsey Jack. 2012. No Margin, No Mission? A Field
Experiment on Incentives for Pro-Social Tasks. STICERD - Economic Organisation and
Public Policy Discussion Papers Series. Suntory and Toyota International Centres for
Economics and Related Disciplines, LSE. http://ideas.repec.org/p/cep/stieop/035.html.
Manning, W.G., Newhouse, J. P., Duan, N., Keeler, E.B. and Leibowitz, A. (1987). Health
insurance and the demand for medical care: evidence from a randomized experiment,
The American Economic Review, vol.77, pp. 25177.
Olivella, Pau, and Marcos Vera-Hernndez. 2013. Testing for Asymmetric Information in
Private Health Insurance The Economic Journal 123 (567): 96130.
doi:10.1111/j.1468-0297.2012.02520.x.