ECON0029: Economics of Information (21/22)

Lecturer: Deniz Kattwinkel (d.kattwinkel@ucl.ac.uk) Time: Term 1, Monday 4pm-6pm Aims: In many economic transactions, involved parties have different information about important characteristics that affect the value of trade. 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. We will discuss applications from labour markets (in particular compensations schemes of managers and CEOs), corporate finance (in particular rationing in credit markets) and the provision of health insurance. The course analyses incentive schemes that are used in situations of Moral Hazard (e.g. non-verifiable effort of an employee or customer of an insurance company), as well as menus of contracts and product lines that are used in the presence of Adverse Selection (e.g. when different customers select different contracts or products based on their preferences). A central theme of the course is that asymmetric information can lead to inefficiencies and market failure. We analyse how agents can overcome these inefficiencies and discuss the consequences of government interventions that aim to improve on the market outcome. The core content of the course is theoretical. The theoretical observations will be applied to specific settings and compared to empirical data on incentive schemes and menus of contracts used in practice. Finally empirical tests are discussed that can be used to identify Moral Hazard and Adverse Selection in insurance markets. Suitable for: 3rd year Economics (L100), Phil/Econ (VL51), Math/Econ (G1L1/G1LC) and Econ/Stats (LG13) students. Please contact the lecturer if you are unsure if this course is suitable for you. Prerequisites: ECON0013 (formerly ECON2001): Microeconomics, ECON0019 (formerly: ECON2007): Quantitative Economics and Econometrics. Assessment: The material covered in the lectures will be evaluated in a 100% Online remote exam in Term 3. The exam is mainly problem based. A sample exam will be posted in the course webpage.