Objectives: Whether private or public decisions are involved, uncertainty is the daily life of economic agents. The analysis of such decisions requires a theory to formalise the consideration of random consequences on each possible alternative. It also requires the ability to quantify this uncertainty and to compare one situation to another. This course aims at providing an introduction to the concepts and tools required for decision making in situations of probabilized uncertainty. Moreover, economic agents have very rarely the same information. This information asymmetry leads in particular to market failures, as the exchange can no longer take place. How can such inefficiency be resolved? In a second part, exchange in a context of asymmetric information will be studied in simple cases.
Outline:
Part 1: Economics of Uncertainty
Chapter 1: Introduction to uncertainty and theory of expected utility
- Preferences relationships
- Utility functions
- The different forms of uncertainty
- Markovitz functions
- St. Petersburg paradox
- Representation of the probabilistic uncertainty
- Theory of expected utility
Chapter 2: Risk and valuation of risk
- Risk aversion
- Certainty equivalent
- Risk premiums
- Approximation of Pratt
- Coefficients of risk aversion
- Utility function properties
- Applications: portfolio selection and insurance request
- Stochastic dominance
Part 2: Information asymmetry
Chapter 3: Self-selection
- Complete information
- Non-linear pricing
- Incomplete information: optimal contract
- Application: industrial economy
Chapter 4: Self-selection and signal theory
- Lemon market ;
- Signal theory, a model of education
- Signal theory, guarantees
- Signal theory, quality and reputation effects
Chapter 5: Some game theory concepts
- Games in normal form
- Equilibrium in dominant strategies
- Nash equilibrium (pure strategies)
- Games in extensive form
- Nash's equilibrium in perfect sub-games
- Applications to oligopoly games
- Collusion: An Introduction to repeated games
Chapter 6: Moral hazard
- Optimal contract with observable effect
- Optimal contract with unobservable effect
- Application to insurance
Grading: 2 continuous assessments during the semester and a final exam at the end of the semester.
Bibliography:
- Jean-Louis Cayatte, Microéconomie de l’incertitude (édition : De Boeck) ;
- Octave Jokung, Microéconomie de l’incertain (édition : Dunod) ;
- Mas-Colell, Whinston et Green, Microeconomic Theory (chapitre 3, édition : Oxford University Press).
Montparnasse
English 
French