Friday, November 18, 2022

Useful Microeconomics

 Microeconomics does not need to be a distant topic. My design of the Applied Microecnomics course  (taught jointly with Javier Asensio) at the Master in Applied Research in Economics and Business of my university combines theory and discussion of empirical papers in top journals.

I paste the syllabus here. As we finish the current edition and we prepare the next one, I would most welcome suggestions of topics, references and discussion papers. 


-Learn the basic skills to understand and be able to use the basic models and theories (old and new) in microeconomics, to better analyze businesses and the economy.

-Use theory to ask relevant questions to be answered with data and empirical work.

-Associate microeconomics to some of the most pressing problems of our time: digital revolution, climate change, inequality.


1.Optimization models of consumer and firm behavior

Utility Maximization. From preferences to demand. Demand functions. Elasticities and consumer surplus. Income effect and substitution effect. An exchange economy. Efficiency. The problem of endogenous, social and changing preferences. Profit maximization and cost minimization: supply functions and cost functions. Technology and costs. Productive efficiency. Existence and objectives of the firm, and agency theory. Transaction costs and incomplete contracts theories of the firm.

 Discussion Paper: Alcott, Braghieri, Eichmeyer, Gentzkow (2020), The welfare effects of social media, American Economic Review, 110(3): 629-76.

 Recommended Reading:

-Varian (2014), chapters 1-10, 14, 15, 18-23.

-Church and Ware (2000), chapter 3.

-Farber, H. (2015), Why Can’t you Find a Taxi in the Rain and Other Labour Supply Lessons from Cab Drivers, Quarterly Journal of Economics, 130(4): 1975-2016.

-Fort, R. (2004), Inelastic Sports Pricing, Managerial and Decision Economics, 25(2): 87-94.

-Nerlove, M. (1961), Returns to Scale in the Electricity Industry, in “Measurement in Economics”, Stanford University.

-Hausman, J.A. (1997), Valuing the Effect of Regulation on New Services in Telecommunications, Brookings Papers on Economic Activity. Microeconomics, vol. 1997: 1-54.

-Bloom, N.; Van Reenen, J. (2007), Measuring And Explaining Management Practices Across Firms And Countries, Quarterly Journal of Economics, Vol. CXXII, Issue 4.

-Garicano, L. (2016), Why Organizations Fail: Models and Cases, Journal of Economic Literature, 54(1): 137-192.


2.Welfare economics: efficiency, fairness and mechanisms of resource allocation

 Property Rights, markets (including financial markets), governments, communities, hyerarchies. Welfare theorems, market failures, Coase theorem, second best, inequalities and merit wants. The “tragedy of the commons.” Social Welfare Functions. Non-welfarist approaches. Instruments of public intervention: public institutions, taxes, public expenditures, regulation. Corporate Social Responsibility. The economics of disruptive change: climate change, digital revolution.

 Discussion Paper: Fremstad, A.; Paul, M. (2019), The Impact of a Carbon Tax on Inequality, Ecological Economics, 163, 88-97.

Recommended Reading (and watching):

-Varian (2014), chapters 9, 16, 33-37.

-Bowles (2004), chapters 2 & 6.

-Hindriks and Myles (2013), chapter 2.

-N. Stern (2010), Imperfections in the Economics of Public Policy, Imperfections in Markets and Climate Change,  Journal of the European Economic Association, 8(2-3): 253-288.

-E. Ostrom (2009), Nobel Prize lecture.

-Robert Shiller’s Financial Markets course on video at Yale University:

-Vives, X. (2016), Competition and Stability in Banking: the role of Competition Policy and Regulation, Princeton University Press.

-Kietzmueller & Shimshak (2012), Economic Perspectives on Corporate Social Responsibility, Journal of Economic Literature, 50(1): 51-84.


3.Basic Game theory

Definition of a Game, Dominant Strategies (examples: prisoners’ dilemma, public goods games), Nash Equilibrium (examples: Hotelling, Cournot, Bertrand), Mixed Strategies, Cooperation and Coordination Games, Risk Dominance, Repeated Games, Sequential Games. Evolutionary Game Theory with 2 players and two types.

 Discussion Paper: Ignacio Palacios-Huerta (2003), Professionals Play Minimax, Review of Economic Studies, Wiley Blackwell, vol. 70(2), pages 395-415, 04.

 Recommended reading:

-Varian (2014), chapters 28 & 29.

-Bowles (2004), chapter 1.

-Dixit, Skeath and Reiley (20 15), Games of Strategy, 4th edition, Norton & Company.

-Levitt, List & Reiley (2010), What Happens in the Field Stays in the Field: Exploring Whether Professionals Play Minimax in Laboratory Experiments, American Economic Review, 78(4): 1413-1434.

-Andreoni, J. (1995), Warm-Glow versus Cold-Prickle: The Effects of Positive and Negative Framing on Cooperation in Experiments, Quarterly Journal of Economics, 110(1): 1-21.


4. The challenges of deciding together: social choice, institutions and political economy in microeconomics

The Public Choice critique. Wicksell and Lindahl: the promise and limits of unanimity. Median voter theorem. Voting rules and Arrow’s impossibility theorem. Inequality and democracy: why the poor do not expropriate the rich in democracies. Lobbying and corruption. Incentives in the public sector. Transaction costs in politics and the political Coase theorem? Institutions and economics.

 Discussion Paper: Ferguson, Voth (2008), Betting on Hitler, Quarterly Journal of Economics.

 Recommended Reading:

-Hindriks and Myles (2013), chapter 11.

-Sen (2017), Collective Choice and Social Welfare, revised edition.

-Achen and Bartels (2016), Democracy for Realists: Why Elections do not produce responsive government, Princeton University Press.

-Acemoglu & Robinson (2012), Why Nations Fail: The Origins of Power, Prosperity and Authority, Crown Business.

-MacLeod, W.B. (2013),   Book Review of “Why Nations Fail” and “Pillars of Prosperity,” Journal of Economic Literature, 51(1): 116-143.

-Rodrik, D. (2020), Why does globalization fuel populism? Economics, Culture, and The Rise of Righ-wing Populism, NBER Working Paper, 27526.

-Bagues & Esteve-Bolart (2016), Politicians’ Luck of the Draw: Evidence from the Spanish Christmas Lottery, Journal of Political Economy, 124(5): 1269-1294.

-Bonica, McCarty, Poole, Rosenthal (2013), Why Hasn’t Democracy Slowed Rising Inequality? Journal of Economic Perspectives, 27(3): 103-124.

-Yermack, D. (2010), Shareholder Voting and Corporate Governance, Annual Review of Financial Economics, 2: 103-125.


5.Regulation of natural monopoly

From perfect competition to monopoly in partial equilibrium. Non-convexities and the welfare theorems. Definition of natural monopoly. Optimal prices for a natural monopoly. Asymmetric information and the Laffont and Tirole model. Sunk investments and the commitment problem. Regulatory capture. Liberalization and universal service. Liberalization and access prices. Vertical integration and separation. Competition for the market and yardstick competition. Natural monopoly and modern digital markets.

 Discussion Paper: Lim, Yurukoglu (2018), Dynamic Natural Monopoly Regulation: Time Inconsistency, Moral Hazard and Political Environments, Journal of Political Economy.

 Recommended Reading:

-Laffont and Tirole (1993), A Theory of Incentives in Procurement and Regulation, MIT Press.

-Laffont (2000), The Political Economy of Regulation, Oxford University Press.

-Church and Ware (2000), chapters 2, 4, 22, 24-26.

-Armstrong and Sappington (2006), Regulation, Competition and Liberalization, Journal of Economic Literature, 44(2): 325-366.

-Estache and Wren-Lewis (2009), Toward a Theory of Regulation for Developing Countries: Following J.J. Laffont’s lead, Journal of Economic Literature, 47(3): 729-70.

-Trillas, F.; Montoya, M.A. (2011), Commitment and Regulatory Independence in Practice in Latin American and Caribbean Countries, Competition and Regulation in Network Industries, 12(1): 27-56.

-Tirole, J. (2020), Competition and the Industrial Challenge for the Digital Age, unpublished paper.


 6. Behavioral Economics

Departures from the standard rationality assumptions. Prospect theory. Behavioral public economics and behavioral industrial organization.

 Discussion Paper: Chetty, R. (2015), Behavioral Economics and Public Policy: A Pragmatic Perspective, American Economic Review, 105(5): 1-33.

 Recommended Reading:

-Varian, H. (2014), chapter 30.

-Hindriks and Myles (2013), chapter 3.

-Dhami, S. (2016), The Foundations of Behavioral Economic Analysis, Oxford University Press.

-Bhargawa & Loewenstein, (2015), Behavioral Economics and Public Policy 102: Beyond Nudging, American Economic Review, 105(5): 396-401.

-Kagel & Roth (2016), Handbook of Experimental Economics, Volume 2, Princeton University Press.

-Salganik, M.J. (2018), Bit by Bit. Social Research in the Digital Age, Princeton University Press.

-Tirole, J. (2017), Economics for the Common Good, Princeton University Press.

-Putterman, L. (2012), The Good, the Bad and the Economy, Langdon Street Press.

-Spiegler, R. (2011), Bounded Rationality and Industrial Organization, Oxford University Press.

-Della Vigna and Malmendier (2006), Paying not to go to the gym, American Economic Review, 96(3): 694-719.

7. Market Power Measurement and Implications

(taught by Javier Asensio)

SCP Paraidgm and NEIO. Is market power rising? Implications for the digital economy & labour markets.

 Recommended Reading:

- J. Church and R. Ware (2000), Industrial Organization: A Strategic Approach, McGraw-Hill, Chapter 12.

P. Davis and E.Garcés (2010), Quantitative Techniques for Competition and Antitrust Analysis, Princeton UP, Chapter. 6.

- Genesove, D., & Mullin, W. P. (1998). Testing static oligopoly models: conduct and cost in the sugar industry, 1890-1914. The RAND Journal of Economics, 355-377.

- De Loecker, J., & Eeckhout, J. (2017). The rise of market power and the macroeconomic implications (No. w23687). National Bureau of Economic Research.


8. Entry dynamics and innovation

(taught by Javier Asensio)

Modelling entry. Estimating market power from entry models. Entry, exit & innovation

Recommended Reading:

- P. Davis and E. Garcés (2010) Quantitative Techniques for Competition and Antitrust Analysis, Princeton UP. Chapter 5.

- T. Bresnahan and P. Reiss (1991) Entry and competition in concentrated markets, Journal of Political Economy, 99, 977-1009.

- Klepper, S. (1996). Entry, exit, growth, and innovation over the product life cycle. The American economic review, 562-583.

- Aghion, P., Blundell, R., Griffith, R., Howitt, P., & Prantl, S. (2009). The effects of entry on incumbent innovation and productivity. The Review of Economics and Statistics91(1), 20-32.

- Dubois, P., De Mouzon, O., ScottMorton, F., & Seabright, P. (2015). Market size and pharmaceutical innovation. The RAND Journal of Economics46(4), 844-871.



General Bibliography

Varian, H. (1992), Microeconomic Analysis, Norton and Company. [CS(-2) E2.10Var (not on loan)]

Varian, H. (2014), Intermediate Microeconomics, 9th edition. [CS(-2) E2.10Var]

Bowles, S. (2004), Microeconomics. Behavior, institutions and evolution. Princeton University Press. [CS(-2). E2.10 Bow]

Bowles & Halliday (2022), Microeconomics (pdf available in Halliday’s web page)

Hindriks and Myles (2013), Intermediate Public Economics, second edition. [CS(-2 & 0). E10.0 Hin]

Church, J. and R. Ware (2000), Industrial Organization: A Strategic Approach, McGraw-Hill. [Can be freely downloaded on-line:]

Davis, P. and E. Garcés (2009), Quantitative Techniques for Competition and Antitrust Analysis, Princeton University Press. [CS(0) E15.232 Dav].

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