Advanced Microeconomics Theory II and Reference File Download Link

Overview

Advanced Microeconomics TheoryII builds on the foundations laid in the first course, moving from static analysis of markets to a dynamic, gametheoretic, and informationasymmetric perspective. The course emphasizes rigorous mathematical modeling, allowing students to understand how strategic interaction, uncertainty, and institutional constraints shape economic outcomes. Topics typically include general equilibrium with incomplete markets, mechanism design, auctions, contract theory, and applications to industrial organization and public economics.

Core Topics

1. General Equilibrium with Incomplete Markets

The classic ArrowDebreu framework assumes a complete set of contingent claims. In reality, markets are incomplete, meaning that not every possible future state can be insured or traded. This topic introduces the concept of statecontingent commodities, the role of Radner equilibrium, and the welfare implications of market incompleteness. Students explore conditions under which a competitive equilibrium exists, how it may be inefficient, and what policy tools can improve allocation.

2. Game Theory and Strategic Interaction

Building on the basic normalform and extensiveform games of the first course, TheoryII expands to repeated games, stochastic games, and games with continuous strategy spaces. The focus is on characterizing Nash equilibria, subgameperfect equilibria, and Bayesian equilibria where players have private information. The section also covers concepts such as tremblinghand perfection, forward induction, and the folk theorem.

3. Mechanism Design

Mechanism design asks: how can a planner achieve a desired outcome when agents act strategically? The course presents the Revelation Principle, incentive compatibility, and individual rationality constraints. Students study classic results like the VickreyClarkeGroves (VCG) mechanism, Myersons optimal auction, and the implementation of social choice functions in dominant strategies.

4. Auction Theory

Auctions are the canonical application of mechanism design. TheoryII covers firstprice, secondprice, English, Dutch, and allpay formats, with both private and common value settings. The analysis includes revenue equivalence, bidding strategies under risk aversion, and the impact of collusion. Realworld examples such as spectrum auctions and procurement contracts illustrate the theory.

5. Contract Theory

Contract theory studies how principals can write contracts to induce desired behavior from agents who have hidden actions (moral hazard) or hidden information (adverse selection). Core models include the principalagent problem, optimal insurance contracts, and the theory of relational contracts. The section also explores multitask settings and the role of performance measurement.

6. Applications in Industrial Organization

The strategic tools developed earlier are applied to analyze market structure, pricing, product differentiation, and entry deterrence. Models such as Cournot, Bertrand, and Stackelberg competition are revisited with asymmetric information and dynamic considerations. Students evaluate antitrust policy using welfare analysis derived from these models.

7. Public Economics and Optimal Taxation

Public economics utilizes mechanism design to design tax and transfer systems. The course covers optimal income taxation under incentive compatibility, redistribution versus efficiency tradeoffs, and the use of nonlinear tax schedules. The Mirrlees model and its extensions are a central focus, alongside discussions of fiscal externalities and public goods.

Methodological Emphasis

The analytical toolkit for Advanced Microeconomics TheoryII consists of convex analysis, fixedpoint theorems, and stochastic calculus where required. Students are expected to become comfortable with:

Prooforiented reasoning and rigorous derivation of equilibrium conditions.
Advanced calculus of variations for optimal contract problems.
Dynamic programming techniques in repeated games and stochastic environments.
Computational methods for solving highdimensional mechanismdesign problems.

The true power of microeconomic theory lies not in describing what is, but in understanding how agents would behave if the rules of the game were altered. Lecture Note, Advanced Microeconomics II

Assessment and Learning Outcomes

Students are evaluated through a combination of problem sets, a midterm exam, and a final project that typically involves designing a mechanism for a realworld economic problem (e.g., designing a spectrum auction or a tuitionfee schedule). By the end of the semester, graduates should be able to:

Formulate and solve models with asymmetric information and strategic interaction.
Derive equilibrium concepts for both static and dynamic settings.
Critically assess the efficiency and equity implications of market designs.
Apply theoretical results to policy questions in industrial organization, public finance, and regulation.

Further Exploration

The field of microeconomic theory continues to evolve. Current research directions include behavioral mechanism design, digital platform economics, and the intersection of machine learning with contract theory. Students interested in these frontiers are encouraged to participate in seminars, read recent journal articles, and consider graduate study.

For updates on upcoming seminars and working papers, visit the Microeconomic Theory Seminar page.

Advanced Microeconomics TheoryII