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VWL VIII: International Competition Policy – Prof. Dr. Fabian Herweg

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Advanced Microeconomics II

Advanced Microeconomics II
(Mikroökonomik für Fortgeschrittene II)

Lecturer: Prof. Dr. Fabian Herweg

eLearning: https://elearning.uni-bayreuth.de/


Target audience:

This course is addressed to students who aim to obtain a Master (or PhD) degree in Economics, Internationale Wirtschaft & Governance, or Philosophy & Economics. Students who are currently completing a Bachelor program are welcome; they may take this course as preparation for international PhD programs, or in order to already start earning credits for the M.Sc. in Economics at the University of Bayreuth.

The analysis of the presented topics will be on a highly abstract and theoretical level. Therefore, students who take part in this course should have a profound knowledge of Microeconomic Theory (Game Theory) and good mathematical skills.

The course is taught entirely in English and will require continuous self-study throughout the semester. Grading of the course will be based on a 60-minute written exam posed in English at the end of the term (the exam can be answered in English or German). If 4 or less participants register for a written exam, an oral examination may be held instead of the written exam.

The course Advanced Microeconomics II gives 6 credit points as Mikroökonomik für Fortgeschrittene II in "Spezialisierung: Modelltheorie" for M.Sc. Economics, in "Spezialisierung: Ökonomische Modellbildung und empirische Analyse" for MA IWG and in "Modul C2 - Economics Electives" for MA P&E.


Course Description: (Lecture 2SWS + Tutorial 1SWS)

The course “Advanced Microeconomis II” is basically an advanced course in Contract Theory and the Theory of Incentives. The first part deals with models of hidden action: How does the optimal incentive contract for an employee look like if the principal cannot monitor the agent’s effort? Problems of moral hazard do not only play a crucial role in labor relationships but also – and probably more importantly – in financial contracting.

The second part deals with models of hidden information, i.e., optimal design of a menu of contracts if the principal cannot observe agents’ types. How should a manufacturer design its wholesale contracts if retailers have private information about the demand?

Finally, if time permits it, recent topics in Contract Theory will be discussed, e.g., Behavioral Contract Theory.


Course Outline (scheduled):

1. Incentives in Economic Thought

2. Hidden Action (Moral Hazard)

2.1 Risk Neutrality and First-Best Implementation

2.2 The Trade-Off between Efficiency and Insurance (Risk Sharing)

2.3 Multiple Levels of Performance

2.4 Informativeness Principal

2.5 Continuum of Actions and the First-Order Approach

2.6 The LEN-Model

2.7 The Multitask Incentive Problem

2.8. Applications: Models of Moral Hazard at Work

3. Hidden Information (Monopolistic Screening)

3.1 The Rent Extraction and Efficiency Trade-Off

3.2 Incentive Compatible Menu of Contracts

3.3 Screening of More than Two Discrete Types

3.4 Continuum of Types and the Revelation Principal

3.5 Type-Dependent Participation Constraints and Countervailing Incentives

3.6 Applications: Screening Models at Work

4. Further Topics in Contract Theory

4.1 Mixed Models of Hidden Action and Hidden Information

4.2 Incomplete Contracts and the Hold-Up Problem

4.3 Behavioral Contract Theory


Main Textbooks:

  • Bolton, P., and M. Dewatripont: “Contract Theory,” MIT Press.
  • Laffont, J.-J., and D. Martimort: “The Theory of Incentives: The Principal-Agent Model,” Princeton University Press.
  • Mas-Colell, A., M. D. Whinston, and J. R. Green: “Microeconomic Theory,” Oxford University Press.


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