MW24.3 - Lecture Quantitative Economics II (Summer 2023) - Master Program in Economics

There are many interesting topics in quantitative economics. In the past we did Auction theory, Information Economics, Bayesian Econometrics, Resampling and Models with Mixed Effects. This year we will study Bargaining Theory:

Online teaching:

The module will be offered online.

• This is a course with a more technical topic. In such a context the online format offers benefits for learning that can't be obtained with traditional lecture room formats. Online videos allow students to follow their own learning speed. Students can pause their video, slow down or fast forward according to their individual preferences. Weekly online homeworks provide regular feedback and encourage students to actively engage with the material. Online discussions and exercises provide and enhance interaction.

  As a result, the online format seems to offer a much better learning experience and more room for students to interact. Students are clearly more successful than students with traditional teaching. With on-line teaching typically fewer than 5% of the students fail the exam. With traditional on-site teaching the number of failing students used to be much higher, typically around 25%.

Lecture:

During the term you will in each week obtain a new set of videos. You can choose when (and how often) you watch these videos. These videos will remain available until the end of the term. I recommend to follow a routine: Watch the weekly videos on always the same day at always the same time.

Homework:

Each week you submit a brief homework (see the Moodle-page of the course). The homework counts for the final grade.

Discussion board:

Please use the discussion board in Moodle.

Online Q+A:

You find the details for the Q+A meeting in Moodle.

Exam:

Thu., 20. 7. 2023, 10:00.
The final grade is 2/3 the result of a final take-home exam and 1/3 the weekly homework.

Prerequisites:

Some game theory (e.g. as covered in BW24.2), basic calculus (here are some basic differentiation rules)

Literature:

• Kalai, E. & M. Smorodinsky (1975): “Other Solutions to Nash`s Bargaining Problem”, Econometrica, 43, 513-518.Jstor
• Muthoo, A. (1999): Bargaining theory with applications. Cambridge Univ. Press, Cambridge
• Osborne, M. J. & A. Rubinstein (1990): Bargaining and markets. Academic Press, San Diego.
• Roth, A. E. (1995): Bargaining Experiments , ch. 4 in The Handbook of Experimental Economics, ed. by J. H. Kagel & A. E. Roth.
• Shaked, A. and J. Sutton (1984), Involuntary Unemployment as a Perfect Equilibrium in a Bargaining Model , Econometrica 52, 1351 1364 Jstor

Outline:

Topic	Lecture in week...	Exercise in week...
Introduction, von Neumann-Morgenstern Utility, Nash's axioms.	14	15
Nash's theorem, applications.	15	16
Risk aversion, applications (bribery, asset ownership).	16	17
Discussion of Nash's axioms.	17	18
Applications (moral hazard in teams).	18	19
The strategic approach: Rubinstein's model.	19	20
Strategies in bargaining in the alternating offers model. Nash equilibrium.	20	21
Subgame perfect equilibrium.	21	22
Constant discount rates, fixed bargaining cost, finitely divisible pies.	22	23
Outside options	23	24
More than two players, comparison Rubinstein/Nash	24	25
Incomplete information.	25	26
Markets and decentralised trade.	26	27

Past exams

 

Motivation:

Consider a situation where two agents obtain gains from cooperation. This could be an exchange that is mutually beneficial or a cooperation in a political or social environment. How should the agents divide the proceeds from their joint project? How is the ratio of goods in an exchange, how the result of a political or personal settlement determined? Market equilibria assume a large number of agents and the presence of a Walrasian auctioneer — assumptions that are not always fulfilled. Bargaining theory attempts to address this issue, studying a situation where a small number of players find a settlement in a distributive conflict. Is the settlement always efficient or is it found only after time consuming and costly negotiations? Who is the winner and who the looser of a settlement? How is bargaining power determined? How, finally, can we compare such a bargaining solution with market equilibria?

Learning aims

Students should understand the main paradigms of axiomatic bargaining theory (Nash, Kalai-Smorodinsky) and of strategic bargaining theory (Rubinstein's alternating offer game).