Economics and CPS Seminar mini-course: Living with Asymmetric Information

Apri. 27, 2016
Living with Asymmetric Information

We will continue our discussion of Hurwicz-Maskin-Mayerson [Nobel 2007] theoretical results, and their implications for various economic domains (production organization, public economics, risk management). To this end, we will turn to Akerlof-Spenser-Stiglitz [Nobel 2001] results. I will cover a famous Akerlof's The Market for "Lemons" paper, which was cited 23+ thousand times (& counting). It is viewed as "a single most important contribution to the literature on economics of information". On a more technical jargon, Akerlof's paper transfers Hurvitz impossibility theorem from the realm of pure math to real life applications. Akerlof's Lemon paper brought in an avalanche. In the coming weeks, we will scratch the surface of this literature, and discuss its usefulness for CPS resilience.

We will characterize environments with various info asymmetries and talk about standard instruments of eliciting hidden info from the players applied therein. Mathematically, this literature is based on "constraint dynamic optimization approach to contracting" [Tirole, 1999] (aka incomplete contracts), where in addition to standard economic constraints (resources and technology), the presence of strategic considerations is acknowledged and modeled explicitly (via IR and IC constraints). I will start connecting with risks and risk management next week (May 4); or May 11th at the latest.

Literature:
Spence, M. Signaling in Retrospect and the Informational Structure of Markets. The American Economic Review, 92(3), 434-459. 2002.

Stiglitz, J. E. Information and the Change in the Paradigm in Economics. The American Economic Review, 92(3), 460-501. 2002.

Akerlof, G. A. Behavioral Macroeconomics and Macroeconomic Behavior. The American Economic Review, 92(3), 411-433. 2002.

Some classical papers:

Spence'73 Job Market Signaling
Rothschild-Stiglitz'76 Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information.
Stiglitz'77 Monopoly, Non-Linear Pricing and Imperfect Information: The Insurance Market
Grosmann- Stiglitz'80 On the Impossibility of Informationally Efficient Markets.