Summer Reading Group on Topics in Political Economy

Below are the readings for each week.  I expect all participants to carefully read the primary readings for each week and be prepared to discuss and/or ask questions.  I have also listed some additional reference material for you to explore on your own.

June 7: Models of knowledge and "agreeing to disagree"

Primary Readings:

  1. The easiest introduction to this topic that I know of is Chapter 3 of Ariel Rubinstein's book Modeling Bounded Rationality. The entire book is online here. Read all of Chapter 3 (pp. 41-62), but you can skip section 3.4. As suggested by the name of the book, this reading also mentions some ways to relax the standard rationality assumptions.
     
  2. The paper "The Common Priors Assumption: A Comment on Bargaining and the Nature of War" by Kris Ramsay and myself contains a couple of simple examples worth looking at.  It is available here (the published version is here).
     
  3. As a more ambitious application, I suggest we read "Mutual Optimism and War" by Kris Ramsay and myself. It is available here.  See if you can completely understand the proof of Theorem 1!
     

Additional Reference Material:

Several textbooks contain chapters that cover this material.  Chapter 5 of A Course In Game Theory by Osborne and Rubinstein is one good example.  The most comprehensive reference is "Common Knowledge" by John Geanakoplos.  It is available online here. 

June 21: Mechanism Design

Mechanism Design is a huge topic and could easily fill an entire semester. The main application in economics is auction theory.  We will focus instead on using the techniques of mechanism design to analyze the equilibria of  large classes of Bayesian games.

Primary Readings:

  1. The fundamental tool of all of Bayesian mechanism design is the Revelation Principle. A good, short introduction to this is section 3.3 of Gibbons's book, Game Theory for Applied Economists (pp. 164-168).  Read this closely! (You should have a copy of this book from PSC 584.  If not, let me know.)
     
  2. For an introduction to mechanism design applied to bargaining, read sections 9.1-9.4 of the book Bargaining Theory with Applications by Abhinay Muthoo.  I have scanned those pages and made them available here.
     
  3. To see this applied to political science, read "Uncertainty and Incentives in Crisis Bargaining: Game-Free Analysis of International Conflict" by Kris Ramsay and myself. It is available here.
     

Additional Reference Material:

Several textbooks contain chapters that cover mechanism design.  Chapter 5 of Game Theory by Fudenberg and Tirole is quite extensive.  In terms of articles, a good place to start is Myerson's 1979 Econometrica paper "Incentive Compatibility and the Bargaining Problem" and also Myerson and Satterthwaite's 1983 Journal of Economic Theory paper "Efficient Mechansims for Bilateral Trading". Another excellent paper to look at is Banks's 1990 American Journal of Political Science paper "Equilibrium Behavior in Crisis Bargaining Games".  

July 9: Evolutionary Game Theory

Evolutionary game theory borrows from biological models and considers what outcomes emerge from an evolutionary process in which more successful players or strategies survive and less successful players or strategies do not. We will focus on how this idea works and what it implies for "standard" game theory.

Primary Readings:

  1. For an introduction to the basics of evolutionary game theory, read sections 13.1-13.3 of Osborne's book, An Introduction to Game Theory (pp. 393-411).  (You should have a copy of this book from PSC 408.  If not, let me know.)
     
  2. A nice discussion of the conceptual issues involved in evolutionary game theory and its application to issues in "standard" game theory is Mailath's Journal of Economic Literature paper "Do People Play Nash Equilibrium? Lessons from Evolutionary Game Theory" available on JSTOR.
     

Additional Reference Material:

Several books contain much more detail on evolutionary game theory. The classic reference is the original 1982 book Evolution and the Theory of Games by John Maynard Smith. Two more recent books worth consulting are Jorgen Weibull's 1995 book Evolutionary Game Theory and Larry Samuelson's 1998 book Evolutionary Games and Equilibrium Selection.  

July 27: Dynamic Games and Markov Perfect Equilibrium

Dynamic games are used to study situations in which the circumstances faced by the players change over time, either as independently from or as a result of the actions of the players. We will study how these games are formulated and the corresponding solution concept, Markov perfect equilibrium.

Primary Readings:

  1. For an introduction to the dynamic games and markov perfect equilbrium, read sections 5.5 and 5.7 of the book Repeated Games and Reputations by George Mailath and Larry Samuelson.  I have scanned those pages and made them available here. Focus on pages 174-181 (particularly example 5.5.2) and pages 192-199.
     
  2. A simple, but interesting example of a dynamic game is Levine's Review of Economic Dynamics paper "The Castle on the Hill," available here.
     

Additional Reference Material:

Chapter 13 of Game Theory by Fudenberg and Tirole contains additional material on dynamic games, while the classic reference is "Markov Perfect Equilibrium" by Maskin and Tirole, Journal of Economic Theory, 2001.  For an important application in political economy, see the book Economic Origins of Dictatorship and Democracy by Acemoglu and Robinson.  

August 10: Principal-Agent Problems

Principal-agent problems deal with situations in which one person (the agent) performs an action on behalf of another person (the principal). The agent may have private information about the action or may have different prefences than the principal. The theory of principal-agent problems investigates how various mechanims can be used to align the incentives of the agent with those of the principal. As with all of the topics we cover, there is a huge literature on principal-agent problems. We will focus on the basics of moral hazard and adverse selection.

Primary Readings:

  1. For a non-technical discussion of the use of principal-agent theory in political science, read Gary Miller's paper "The Political Evolution of Principal-Agent Models," in the 2005 Annual Review of Political Science, available here.
     
  2. For a the technical details of the standard principal-agent contracting model, read parts of Chapters 2 and 4 of the book Contract Theory by Patrick Bolton and Mathias Dewatripont.  I have scanned those pages and made them available here and here. We will cover the material in Chapter 4 first and then the material in Chapter 2.
     

Additional Reference Material:

There is a huge literature on principal-agent problems. A good reference for the technical details of the models we will look at is Chapter 14 of Microeconomic Theory by Mas-Colell, Whinston and Green. 

August 24: War of Attrition Games

The war of attrition is an example of a game of timing. In the standard model, two agents compete for a indivisible benefit. Each agent decides how long to stay in the contest before conceding. The game ends as soon as an agent concedes and the benefit is awarded to the agent who remains in the contest at this point. As long as the contest lasts, however, both players must pay a cost. We will cover this standard model in both discrete and continuous time and look at some generalizations.

Primary Readings:

  1. For an introduction to the standard war of attrition model, read section 4.5.2 in Game Theory by Fudenberg and Tirole (pp.119-126).  (You should have a copy of this book from PSC 584.  If not, let me know.)
     
  2. For a generalized war of attrition model, read the cleverly titled paper "The Generalized War of Attrition," by Bulow and Klemperer in The American Economic Review, 1999, available here.
     

Additional Reference Material:

The original presentation of the war of attrition is John Maynard Smith's 1974 Journal of Theoretical Biology paper "Theory of games and the evolution of animal contests". Other useful references are Fudenberg and Tirole's 1986 Econometrica paper "A Theory of Exit in Duopoly" and Hendricks, Weiss, and Wilson's 1988 International Economic Review paper "The War of Attrition in Continuous Time with Complete Information".  

 

Last Updated: 08/22/2007