II Term: January - March

  • Microeconomics II 

The course will focus on Economics of information. One economic agent has often more information about a characteristic that is relevant to an agreement, than the other. In this module, we will study how agents deal with this information asymmetry by designing incentives and embedding them in contracts. We will also studyu the effects of information asymmetry on the prevailing market equilibrium. Applications of the theory include insurance, labour economics, industrial economics.
By the end of the module, students should be familiar with the different types of information asymmetries and their consequences in contract design and market equilibrium and should be able to solve principal-agent models using appropriate mathematical tecniques.
  1. Introduction
  2. The types of asymmetric information
  3. The basic principal agent model; Description of the model; Symmetric information contracts
  4. The moral hazard problem; The case when the agent chooses between two effort levels; Continuous effort; Applications
  5. The adverse selction problem; A model for one principal and one agent; When principals compete for agents; Applications
  • Bolton, P and Dewatripont, M "Contract Theory", The MIT Press, 2005
  • Macho-Stadler, I and Perez-Castrillo, J.D "An introduction to the Economics of Information Incentives and Contracts", Oxford University Press, 2001
  • Salanie, B. "The Economics of Contracts" MIT Press, 2005.

  • Macroeconomics I 

The Solow growth model. The Ramsey-Cass-Koopmans model. The Diamond model. Cross country income differences. Consumption under uncertainty: permanent income/random walk hypothesis. Investments: a model of investment with adjustment costs, Tobin’s Q. Real business cycle theory: a baseline Real-business Cycle model. Inflation and monetary policy: inflation money growth and interest rates, the dynamic inconsistency of low-inflation monetary policy, addressing the dynamic inconsistency problem.
  • David Romer, "Advanced Macroeconomics", fourth edition, Irwin/McGraw-Hill, 2001;
  • Oliver Blanchard and Stanley Fisher, "Lectures on Macroeconomics", MIT Press, 1990;
  • Robert Barro and Xavier Sala-i-Martin, "Economic Growth", McGraw-Hill, 1995;
  • Philippe Aghion and Howard Howitt, "The Economics of Growth" MIT Press, 2009

  • Asset pricing 

Functions of financial markets. Model of consumption and investment choice in autarchy and with perfect financial markets: Fisher’s separation theorem. Consumption and investment with imperfect financial markets. Choices under risk: expected utility, attitudes to risk, risk premium, HARA utility, comparing risk (first order stochastic dominance, second order stochastic dominance). Intertemporal choice under uncertainty and asset pricing: introduction. Contingent claims markets: law of one price, arbitrage, complete markets and state prices, relation between state prices and asset prices, equilibrium state prices, risk neutral probabilities. Mean-variance analysis: efficient frontier with N risky assets, two-fund separation theorem, tangency portfolio, market equilibrium (CAPM) without and with a riskless asset, extensions of the static CAPM. Consumption-based asset pricing: Merton’s intertemporal CAPM, Lucas model, equity premium puzzle. Empirical evidence: testing the CAPM and the CCAPM. Bond pricing and term structure of interest rates. Market efficiency and investor rationality.
  • John H. Cochrane, "Asset Pricing", Princeton University Press;
  • Jean-Pierre Danthine and John B. Donaldson, "Intermediate Financial Theory", Prentice Hall 2002

  • Econometrics 

Classical multiple linear regression model: ordinary least squares (OLS), goodness of fit and analysis of variance. Finite sample properties of the OLS estimator: unbiased estimation, variance of the OLS estimator and the Gauss Markov theorem. Estimation of the variance of the least square estimator. Normality assumptions and basic statistical inference. Data problems: multicollinearity and missing observations. Large sample properties of the OLS estimator: consistency, asymptotic normality, asymptotic efficiency. Instrumental Variables and Hausman’s specification test. Inference and Prediction. Tests for structural change: dummy variables, partitioned regression. Specification analysis and model selection: irrelevant variables and omission of relevant variables. Nonspherical disturbances and generalized regression model: GLS and FGLS. Heteroskedasticity: inefficiency of OLS, estimated covariance matrix of the parameters, Generalized Method of Moments (GMM), estimation of the heteroskedastic regression model, testing for heteroskedasticity. Serial Correlation: disturbance processes, testing for autocorrelation; models with lagged variables.
  • William H. Greene, "Econometric Analysis", Pearson Education,2003