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Part 1: Walrasian economies
1.1 Welfare theorems.
1.2 Existence and structure of equilibrium map.
1.3 Competitive equilibrium and product differentiation.
1.4 Miscellaneous topics: Lotteries, Clubs, Lindahl equilibrium, [...].
References:
- Adam Smith, The Wealth of Nations, Strahan and Cadell, 1776; Ch. 1-3 and 6,7.
- Andreu Mas-Colell, Michael Whinston, and Jerry Green, Microeconomic Theory, Oxford University Press, 1995; Ch. 15-17.
- Bryan Ellickson, Competitive Equilibrium: Theory and Applications, Cambridge University Press, 1993; Ch. 3.
- Oliver Hart, "Perfect Competition and Optimal Product Differentiation," Journal of Economic Theory, 1980, 22, 279-312.
- Louis Makowski, "Perfect Competition, the Profit Criterion, and the Organization of Economic Activity," Journal of Economic Theory, 1980, 22, 222-42.
- Ed C. Prescott and R. Townsend, "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, 1984, 52, 21-45.
- Hal Cole and Ed C. Prescott, "Valuation Equilibrium with Clubs," Journal of Economic Theory, 1997, 74(1), 19-39.
- Ken Arrow, "The Organization of Economic Activity: Issues Pertinent to the Choice of Markets Versus Non-Market Allocation," in Collected Papers of K.J. Arrow, 1983, vol. 2, Harvard University Press.
Readings and exercises:
- MWS - Ch. 15 on Edgeworth boxes is a good relaxing reading; only for those who understand better through figures. I suggest avoiding the part on production (Sections 15.C and 15.D) in any case. Section 15.E is really just motivational - bedtime reading.
No exercises on Ch. 15. If you really have to, do 15.B.1
- MWS - C. 16 on Welfare theorems should be studied carefully, until 16.D included. Unfortunately the notation allows for production, which does not pay an important role and blurs the proofs. Nothing you can do about this, except looking at my notes (the ones you took in class) and at Douglas Gale's notes (which however are more careful on allowing for Weak Pareto Optimality and Quasi-equilibria than I care to be).
- MWG - Ch. 17 is beautiful. Study carefully up to 17.C. Read 17.D, though I will talk more (and differently: I will use degree theory rather than index theory) about this in class.I will discuss selected parts of the rest of the chapter, on Debreu-Sonnenschein-Mantel's theorem and on uniqueness, in future classes.
Exercises: 17.B.3, 17.D.3 and 17.D.
- Differentiable approach: I have written notes on this.
No Exercises.
Part 2: Strategic foundations
2.1 Core, Market games, Bargaining.
References:
- Andreu Mas-Colell, Michael Whinston, and Jerry Green, Microeconomic Theory, Oxford University Press, 1995; Ch. 18.
- Douglas Gale, Lecture Notes, Ch. 5, NYU.
- Lloyd Shapley and Martin Shubik, "Trade Using One Commodity as a Means of Payment," Journal of Political Economy, 1977, 85, 937-68.
- Martin Osborne and Ariel Rubinstein, Bargaining and Markets, 1990, Academic Press; Ch. 8.
Readings and exercises:
- Nothing for now. We moved this section at the end, if time permits.
Part 3: Financial market economies: Two-period
3.1 Contingent commodities (Arrow-Debreu), Financial markets equilibrium, Aggregation, No-arbitrage theorem.
3.2 Complete and incomplete financial markets: Existence and welfare, sunspots.
3.3 Finance: Asset pricing and Modigliani-Miller.
References:
- Alberto Bisin, Lecture notes, 2009, NYU.
- Michael Magill and Martine Quinzii, Theory of Incomplete Markets, 1996, MIT Press.
- David Cass and Karl Shell, "Do Sunspots Matter?," Journal of Political Economy, 1983, 193-227.
- John Cochrane, Asset Pricing, 2005, Princeton University Press; Ch. 5.
Readings and exercises:
- Read my Lecture notes, first of all.
Exercises (The notation is as in my notes):
- Problems 42 and 43 in my notes. Note however that you won't be able (at least based on what I have shown in class) to prove genericity results; it is enough that you check if the constraints on the consumption set do or do not involve prices.
- Consider an economy with L=1 and J<S assets (one commodity, incomplete markets). Prove the following: if each agent endowment vector is in the asset span <A>, then any equilibrium allocation is Pareto optimal (not just constrained Pareto optimal, really Pareto optimal).
- Consider an economy with L=1 and J<S assets (one commodity, incomplete markets). Suppose all agents (there's at least 2) have identical quadratic preferences (but different endowment vectors). Prove the following: equilibrium prices only depend on aggregate endowments, not on the distribution of the endowments across agents.
- Magill-Quinzii, Ch. 2, is also a very useful reference. There is more than we have done in class - very clear and careful.
Part 4: Competitive equilibrium and contracts
4.1 Exclusive contracts - Moral hazard.
4.2 Exclusive contracts - Adverse selection.
4.2 Non-Exclusive contracts - Moral hazard and Adverse selection.
Ch. 5: Financial market economies: Infinite-horizon
5.1 Bubbles
5.2 Recursive competitive equilibrium