LONDON SCHOOL OF ECONOMICS

Professor Leonardo Felli

Department of Economics

32L.4.02; x7525

EC487

2014/15
Reading List
EC487 Advanced Microeconomics
Part 2: Lent Term

The course is based on 10 2-hours lectures and 10 1-hour classes. The course
evaluation is based on a 3 hours exam in the Summer term. All lectures, problem
sets and solutions will be available at http://econ.lse.ac.uk/staff/lfelli/teaching.html.

Main textbooks:
Andreu Mas-Colell, Michael Whinston and Jerry Green, Microeconomic
Theory, Oxford: Oxford University Press, 1995. (MWG hereafter).
Martin J. Osborne and Ariel Rubinstein, A Course in Game Theory, Cambridge: M.I.T. Press, 1994.
Reference books:
Drew Fudenberg and Jean Tirole, Games Theory, Cambridge: M.I.T. Press,
1991. (FT hereafter).
Course Outline
1. Game Theory: Static Games of Complete Information (MWG: Ch. 8 (8.A8.D), Ch. 12 (12.A-12.C); FT: Ch. 1)
Kreps, D. M. (1987): Nash Equilibria, in The New Palgrave Dictionary of
Economics, J. Eatwell, M. Milgate, and P. Newman (Eds.), Palgrave Macmillan.

Dasgupta, P. and E. Maskin (1986): The Existence of Equilibrium in Discontinuous Economic Games, 1: Theory, Review of Economic Studies, 53,
1-26.
2. Games with simple dynamic Structure and Subgame Perfection (MWG: Ch.
7, Ch. 9 (9.A-9.B); FT: Ch. 3)
Selten, R. (1975): A Re-examination of the Perfectness Concept for Equilibrium Points in Extensive Games, International Journal of Game Theory, 4,
2555.
3. Bargaining games (MWG: Ch. 9 (Appendix A); FT: Ch. 4 (4.4, 4.6)).
Rubinstein, A. (1982): Perfect Equilibrium in a Bargaining Model, Econometrica, 50, 97110.
Shaked, A. and J. Sutton (1984): Involuntary Unemployment as a Perfect
Equilibrium in a Bargaining Model, Econometrica, 52, 135164.
Sutton, J. (1986): Non-Cooperative Bargaining Theory: an Introduction, Review of Economic Studies, 53, 70924.
Anderlini, L. and L. Felli (2001): Costly Bargaining and Renegotiation, Econometrica, 69, 377-411.
4. Repeated Games and Applications: Cartels (MWG: Ch. 12 (12.D-12.F, Appendix A): FT: Ch. 5).
Fudenberg, D. and E. Maskin (1986): The Folk Theorem in Repeated Games
with Discounting and Incomplete Information, Econometrica, 54, 53354.
Porter, R. (1983): Optimal Cartel Trigger Price Strategies, Journal of Economic Theory, 29, 31338.

Abreu, D., D. Pearce and E. Stacchetti (1986): Optimal Cartel Equilibrium

with Imperfect Monitoring, Journal of Economic Theory, 39, 25169.
Abreu, D., D. Pearce and E. Stacchetti (1990): Toward a Theory of Discounted
Repeated Games with Imperfect Monitoring, Econometrica, 58, 104164.
Part 2: Games of Incomplete Information
5. Static Bayesian Games and Bayesian Equilibrium (MWG: Ch. 8 (8.E-8.F);
FT: Ch. 6).
Myerson, R. (1983): Bayesian Equilibrium and Incentive Compatibility: An
Introduction, in Social Goals and Social Organizations, by L. Hurwicz, D.
Schmeidler, and H. Sonnenschein (eds.) Cambridge: Cambridge University
Press.
6. Mechanism Design and Auctions (MWG: Ch. 23; FT: Ch. 7).
dAspremont, L. and L. A. Gerard-Varet (1979): Incentives and Incomplete
Information Journal of Public Economics 11, 2545.
Chatterjee, K. and W. Samuelson (1983): Bargaining under Incomplete information, Operation research, 31, 83551.
Myerson, R. and M. Satterthwaite (1983): Efficient Mechanisms for Bilateral Trading, Journal of Economic Theory, 28, 26581.
Myerson, R. (1981): Optimal Auction Design, Mathematics of Operation Research 6, 5873.
7. Dynamic Games of Incomplete Information: Perfect Bayesian Equilibrium
and Signaling (MWG: Ch. 9 (9.C), Ch. 13 (13.A-13.C); FT: Ch. 8 (8.2)).
Fudenberg, D. and J. Tirole (1991): Perfect Bayesian Equilibrium and Sequential Equilibrium, Journal of Economic Theory, 53, 23660.
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Spence, A. M. (1973): Job Market Signaling, Quarterly Journal of Economics,

87, 35574.
8. Reputation (MWG: Ch. 9 (9.D); FT: Ch. 9).
Kreps, D., P. Milgrom, J. Roberts and R. Wilson (1982): Rational Cooperation in the Finitely Repeated Prisoner Dilemma, Journal of Economic Theory, 27, 24552, 486502.
Part 3: Incentive Theory
9. Adverse Selection (MWG: Ch. 13 (13.D); FT: Ch. 7 (7.1-7.3))
Armstrong, M. (1996): Multiproduct Nonlinear Pricing, Econometrica, 64,
51-75.
Baron, D. and R. Myerson (1982): Regulating a Monopolist with Unknown
Costs, Econometrica, 50, 911-30.
Guesnerie, R. and J.-J. Laffont (1984): A Complete Solution to a Class of
Principal-Agent Problems with an Application to the Control of a Self-Managed
Firm, Journal of Public Economics, 25, 329-69.
Laffont, J.-J. and J. Tirole (1986): Using Cost Observation to Regulate Firms,
Journal of Political Economy, 94, 614-41.
Maskin, E. and J. Riley (1984): Monopoly with Incomplete Information, Rand
Journal of Economics, 15, 171-96.
Mirrlees, J. (1971): An Exploration in the Theory of Optimum Income Taxation, Review of Economic Studies, 83, 175-208.
Myerson, R. (1979): Incentive Compatibility and the Bargaining Problem,
Econometrica, 47, 61-73.
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Rochet, J.-C. and P. Chone (1998): Ironing, Sweeping and Multidimensional

Screening, Econometrica, 66, 783-826.
10. Moral Hazard and Incentive Contracts (MWG: Ch. 14 (14.A-14.B)).
Anderlini, L. and L. Felli (2008): Agency Problems, in The New Palgrave
Dictionary of Economics, Second Edition, Steven N. Durlauf and Lawrence
E. Blume (Eds.), Palgrave Macmillan.
Grossman, S. and O. Hart (1983): An Analysis of the Principal-Agent Problem, Econometrica, 51, 7-45.
Hart, O. and B. Holmstrom (1987): The Theory of Contracts, in Advances
in Economic Theory, Fifth World Congress, Truman Bewley ed. Cambridge:
Cambridge University Press, 71-155.
Holmstrom, B. (1979): Moral Hazard and Observability, Bell Journal of Economics, 10, 74-91.
Holmstrom, B. and P. Milgrom (1987): Aggregation and Linearity in the Provision of Intertemporal Incentives, Econometrica, 55, 303-28.
Holmstrom, B. and P. Milgrom (1991): Multitask Principal-Agent Analyses,
Journal of Law Economics and Organization, 7, special issue.
Innes, R. (1990): Limited Liability and incentive Contracting with Ex-Ante Action Choices, Journal of Economic Theory, 52, 45-67.
Jewitt, I. (1988): Justifying the First-Order Approach to Principal-Agent Problems, Econometrica, 56, 7-45.
Mirrlees, J. (1976): The Optimal Structure of Incentives and Authority Within
and Organization, Bell Journal of Economics, 7, 105-31.
Mirrlees, J. (1999): The Theory of Moral Hazard and Unobservable Behaviour:
Part I, Review of Economic Studies, 66, 3-21.
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Rogerson, W. (1985): The First-Order Approach to Principal-Agent Problems, Econometrica, 53, 1357-68.