**Instructor: Luca Panaccione**

E-mail address: lpanaccione@luiss.it

Office hours: Thursday 11.00-12.00 or by appointment to be scheduled by e-mail

**Teaching Assistant: Emanuele Brancati**

E-mail address: ebrancati@luiss.it

Office hours: Wednesday 10.00-11.00 or by appointment to be scheduled by e-mail

**Announcements**

- The webpage of the course is now available
- The lecture scheduled for Thursday, March 24, is cancelled and it will be rescheduled during April.
- The next practice class is scheduled for Wednesday, March 23.
- The office hours scheduled for Thursday, March 24, is cancelled.
- The Problem Set 2 is available here
- The lecture scheduled on Thursday, April 7 is prolonged to 18.30
- Two lectures have been scheduled for Monday, April 18 and Monday, May 2 from 16.00 to 17.30
- The handout on the Voluntary Contribution Mechanism is available here
- The lecture scheduled for Thursday, April 28 is postponed to Monday, May 9 from 16.00 to 17.30 (A204)
- The full list of exercises is available here (for the solution send an email to lpanaccione@luiss.it and ebrancati@luiss.it)
**The office hours for the first semester of the academic year are scheduled every Thursday from 11.00 to 12.00 or by appointment.**

**Class schedule**

- Wednesday, 14.00 – 16.30
- Thursday, 16.30 – 18.00

**Reference, Exam Rules & Topics**

- A. Mas-Colell, M.D. Whinston and J.R. Green (MWG),
*Microeconomic Theory*, Oxford University Press, 1995 - J.J. Laffont and D. Martimort (LM),
*The Theory of Incentives: The Principal-Agent Model*, Princeton University Press, 2002

- The final exam consist in a written test only
- The mock exam is available here

- Detailed list of topics:
- The Consumption Set. Competitive Budgets. (MWG 2.A-2.D)
- Demand Functions and Comparative Statics. (MWG 2.E)
- Preference Relations. Utility Function. (MWG 3.A-3.C)
- Utility Maximization Problem and the Indirect Utility Function (MWG 3.D)
- Expenditure Minimization Problem and the Expenditure Function (MWG 3.E)
- Relationships between Demand, Indirect Utility and Expenditure Functions (MWG 3.G)
- Welfare Evaluation of Economic Changes. (MWG 3.I)
- Production Sets and Profit Maximization (MWG 5.A-5.C)
- Cost Minimization (MWG 5.C-5.D)
- Partial Equilibrium Competitive Analysis. (MWG 10.A-10.C)
- Pareto Optimality and Competitive Equilibria. (MWG 10.D-10.E)
- Externalities and Public Goods (MWG 11.A – 11.C)
- Pure Exchange General Equilibrium Economies. The One-Consumer, One-Producer Economy (MWG 15.A – 15.C)
- The Fundamental Welfare Theorems (MWG 16.A-16.D)
- The Principal-Agent Model with Hidden Knowledge. (LM 2.1-2.5)
- The Rent Extraction-Efficiency Trade-Off (LM 2.6)
- Further Topics on The Principal-Agent Model with Hidden Knowledge (LM 2.7- 2.12)
- Contract Theory at Work (LM 2.15)
- The Principal-Agent Model with Hidden Action, or Moral Hazard (LM 4.1-4.2)
- The Trade-Off Between Limited Liability, Rent Extraction and Efficiency (LM 4.3)
- The Trade-Off Between Insurance and Efficiency (LM 4.4)
- Contract Theory at Work (LM 4.8)

**Lectures**

- Introduction to the course. Consumption set and Budget set. Introduction to the Utility Maximization Problem (17.02.2016)
- Preferences and Utility. Properties of the Walrasian demand correspondence (18.02.2016)
- Indirect utility function. Expenditure Minimization Problem. Equivalence of UMP and EMP (24.02.2016)
- Expenditure function. Law of Compensated Demand. Income and substitution effect (25.02.2016)
- Practice Class 1 (by E. Brancati – 02.03.2016)
- Concavity of the Expenditure Function and Derivative of the Expenditure Function with respect to Prices. Properties of the Hicksian Demand Correspondence (02.03.2016)
- Roy’s Identity. Cournot and Engel Aggregation. Sltusky Equation. Normal, Inferior, and Giffen Goods (03.03.2016)
- Income and Substitution Effects with Initial Endowments. Production set and production plans. Returns to scale (09.03.2016)
- Profit Function and Supply Correspondence. Law of Supply. Cost Minimization, Conditional Factor Demand Correspondence and Cost Function (10.03.2016)
- Introduction to Competitive Equilibrium. Partial Competitive Equilibrium Analysis (16.03.2016)
- Efficiency of Partial Competitive Equilibrium. Inefficiency of Partial Competitive Equilibrium with Excise Tax (17.03.2016)
- Practice Class 2 (by E. Brancati – 23.03.2016)
- Externalities (30.03.2016)
- Public Goods: The Linear Voluntary Contribution Model (06.04.2016)
- Public Goods: Efficiency and Equilibrium (07.04.2016)
- Practice Class 3 (by E. Brancati – 13.04.2016)
- Pure Exchange General Equilibrium Economy. The Edgeworth box (14.04.2016)
- Production General Equilibrium Economy. The One-Consumer, One-Producer Economy (18.04.2016)
- Fundamental Welfare Theorems. Introduction to the Principal Agent Model (20.04.2016)
- The First-Best Optimal Contract. Incentive Feasible Contracts with Adverse Selection (21.04.2016)
- The Second-Best Optimal Contracts. Contract Theory with Adverse Selection at Work: Nonlinear Pricing by a Monopoly, Quality and Price Discrimination (27.04.2016)
- Practice Class 4 (by E. Brancati – 02.05.2016)
- Contract Theory with Adverse Selection at Work: Financial Contracts. General Cost Function for the Agent in the PA model with Adverse Selection. Introduction to the Principal Agent Model with Moral Hazard (05.05.2014)
- Principal Agent Model with Moral Hazard: First Best Optimal Contract; Second Best Optimal Contract with Risk-Neutral Agent with and without Limited Liability Constraints (09.05.2016)
- Practice Class 5 (by E. Brancati – 11.05.2016)
- Contract Theory with Moral Hazard at Work: Sharecropping, Financial Contracts (12.05.2016)

**Supplementary information regarding the list of topics:** in addition to the general information reported in the previous sections, for the students’ convenience it is specified that the following parts are required for the exam:

- Propositions from Mas-Colell et al. (1995)
- Propositions 2.E.2 and 2.E.3
- Propositions 3.D.2 and 3.D.3 (except (iv))
- Propositions 3.E.1, 3.E.2 (except (iv)), 3.E.3, and 3.E.4
- Propositions 3.G.1, 3.G.3, and 3.G.4
- Proposition 5.C.1 (except (iii) and (vii))
- Proposition 5.C.2 (except (iii) and (vii))
- Proposition 16.C.1

- Chapter 10 of Mas-Colell at al. (1995) is to be done in connection with the handout provided (“Marshall without Calculus”).
- Chapter 10 of Mas-Colell at al. (1995) is to be done until page 364.
- Chapter 15 of Mas-Colell at al. (1995) is to be done until page 529.
- Chapter 16 of Mas-Colell at al. (1995) is to be done until the statement of the Second Welfare Theorem and including the discussion following the proof.
- As for the part on “Further Topics on The Principal-Agent Model with Hidden Knowledge”, only Section 2.10 is confirmed in the final version of the program (until page 53)
- As for the part on “Contract Theory at Work” (with Hidden Knowledge or Adverse Selection), section 2.15.2, 2.15.3 and 2.15.4 are confirmed in the final version of the program
- As for the part on Moral Hazard, the program is confirmed until page 161 (Proposition 4.5 included)
- As for the part on “Contract Theory at Work” (with Moral Hazard), section 4.8.2 and section 4.8.4 are included in the final version of the program