KSG API-302 Analytic Frameworks for Policy

Faculty: Jean Camp; Edward Parson
SemesterFall
Course Credit:1.0

DayTimeRoom
1st Day9/12
Meet TimeT\Th11:40 - 1:00Starr
ReviewF8:40 - 10:00L140

Description

Develops abilities in using analytic frameworks in the formulation and assessment of public policy. Considers a variety of analytic techniques, particularly those directed toward uncertainty and interactive decision problems. Emphasizes the application of techniques to policy analysis, not formal derivations. Students encounter case studies, methodological readings, the computer, a final exam, and challenging problem sets. Prerequisites: An understanding of intermediate-level microeconomic theory and introductory techniques of optimization and decision analysis, API-101, API-102, or equivalent.

Open to MPP1 students only if they have exempted from API-101 and API-102.

 



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Syllabus
Last Updated:09/12/2002 01:25:44 PM
API-302
Fall 2002
A-1
API-302
ANALYTIC FRAMEWORKS FOR POLICY

Course Information

Where, When: Lecture: Kennedy School of Government, Starr Auditorium
Tuesday/Thursday, 11:40 a.m. - 1:00 p.m.
Review Sections: L-140, Friday, 8:40-10:00 a.m.

Instructors: Ted Parson, L-208, 495-1404 Jean Camp, L-213, 496-6331
ted_parson@harvard.edu jean_camp@harvard.edu

Faculty assistants: Kate Regnier, L-376A, 495-9528 Michael Johnson, L-211A, 495-9455
kate_regnier@harvard.edu michael_johnson@harvard.edu

Teaching Assistants: Christoph Meier,
Jeff Bielicki,
Jonathan Borck

Office Hours: To be announced

Course Description

Develops abilities in using analytic frameworks in the formulation and assessment of public policy. Considers a variety of analytic techniques, particularly those directed toward uncertainty and interactive decision problems. Emphasizes the application of techniques to policy analysis, not formal derivations. Students encounter case studies, methodological readings, the computer, the Internet, a final exam, and challenging problem sets.

Content: Economics Game Theory
Analytic Methods Behavioral Economics
Finance Policy Assessment and Prescription

Prerequisites
      Interest in policy issues, and positive attitude toward approaching them analytically
      Comfort with mathematical concepts (e.g., probability, matrices, elementary calculus)
      Some acquaintance with analytic models (e.g., Stokey and Zeckhauser, Primer for Policy Analysis), elementary decision theory (e.g., Raiffa, Decision Analysis), intermediate microeconomics (e.g., Nicholson, Microeconomic Theory, or Hirshleifer, Price Theory and Applications)
      Diligence, Inquiring mind, Sense of humor
Course Requirements
      Reading assignments to be completed for each class.
      Participation in class discussion
      Participation in study groups
      Preparation of class notes for classmates
      Problems of the day (to be prepared before class for selected classes)
      Two short written assignments (in various formats, scheduled for individuals or small groups throughout the semester)
      Three problem sets
      Final examination in December
Portfolio of Materials and Rationale

Some types of material are best mastered by reading, some through lecture, some through independent assignments, and others through working problems. This course seeks to allocate subject areas and methods to the mechanisms that teach them best. The consequence is that there is often less overlap among readings, lectures, and problems than you might expect from past experience. Just because a topic is not discussed in class does not mean it is unimportant. In general, particular analytic techniques are taught through readings; their application, justification, and weaknesses are more likely to be the subject of in-class instruction and discussion. Structure your expectations and study habits for this course accordingly.

Final Exam: 3-hour in-class exam. Monday, December 17, 2001, 9:00 a.m.-12:00 p.m.
(Some potential questions may be handed out in advance.)

Participation in study groups is required. We will arrange groups.

Seating: Please use your name card each class all semester.

Sections: Weekly sections will be taught by our able course assistants. The sections will review some topics covered in class or in readings, will provide guidance in approaching problem sets (indeed provide hints), and will occasionally cover supplementary material.

Problems/Questions of the Day: For some classes, a problem will be distributed. It will be the focus for a significant amount of discussion for the next class. Students will be expected to work on the problem before class, to be prepared to discuss their thinking and/or results, and in some cases to hand the problem in before class. For these problems, collaboration is permitted.

Text and Readings

Many of the materials in this course will be distributed at the Course Materials Office (CMO, in Belfer G-7, on the ground level); charges for reproduction and copyright will appear on your term bill. (Check with the CMO for payment arrangements for non-KSG students.) All required and optional readings are on reserve in the KSG library. (A few required readings, for which permissions were unavailable or outrageously priced, are only on reserve, not in the packet.) Short supplementary readings will be distributed periodically in class. Most short materials prepared by class participants, including class notes, will be distributed over the Internet.

Useful books, on reserve in the KSG library:

Richard Zeckhauser, ed., "Problems in Analytic Methods" (workbook of typical problems for exams or homework. On reserve in the library.)

Alpha C. Chiang, Fundamental Methods of Mathematical Economics (often used as a text for "Mathematics for Economists" course in Econ Department)

Thomas E. Copeland and J. Fred Weston, Financial Theory and Corporate Policy (a helpful, comprehensible finance text)

Morris H. DeGroot, Probability and Statistics (a thorough, mathematically oriented approach to probability and statistics)

Avinash Dixit and Susan Skeath, Games of Strategy (a highly accessible recent text on game theory)

Robert Gibbons, Game Theory for Applied Economists (fairly challenging but mostly accessible text with emphasis on application)

Frederick S. Hillier and Gerald J. Lieberman, Introduction to Operations Research (a good, reasonably easy supplementary text on analytic techniques)

David M. Kreps, A Course in Microeconomic Theory (an elegantly presented relatively new text, with an emphasis on game theory. You might purchase this volume if you have a strong interest in economics.)

R. Duncan Luce and Howard Raiffa, Games and Decisions (a classic, accessible presentation of game theory)

Roger B. Myerson, Game Theory (a contemporary but advanced text)

Walter Nicholson, Microeconomic Theory (a good microeconomics text that is a touch more advanced than Mansfield. It covers required background material on microeconomics.)

Howard Raiffa, Decision Analysis (the most accessible way to learn this important material)

Thomas Schelling, Micromotives and Macrobehavior (though not a textbook, this book teaches by example. It is an elegant presentation of interactive models applied to policy)

Edith Stokey and Richard Zeckhauser, A Primer for Policy Analysis (covers required background material in analytic methods at an introductory level, available at the COOP. If you do not know this material, we recommend buying this book.)

Richard Thaler, The Winner's Curse (highly readable and full of fun-filled facts, at the COOP)

Jean Tirole, The Theory of Industrial Organization (an excellent and challenging book on the current state of industrial organization, with an emphasis on game theory.)

Hal R. Varian, Microeconomic Analysis (a useful, more advanced text)

Harvey M. Wagner, Principles of Operations Research (a supplementary text, more difficult than Hillier and Lieberman)

The materials we distribute during the course, whether on paper or via the Internet, will be numbered in sequence as either A (administrative), S (short pieces, often newspaper articles),
R (readings), N (class notes), P (problem sets and solutions), D (discussion problems and problems of the day), or E (enrichment exercises). Readings will usually be distributed through the CMO, the other materials mostly in class. Any extra copies of materials distributed in class can be found on the shelf outside Professor Camp's office (L-213).

Problem Sets
Problem Set Due Date
One Friday, October 11
Two Friday, November 8
Three Friday, December 6

Problem sets are due by 12:00 p.m. From time to time, additional problems will be presented in class that can substitute for portions of a problem set.

We organize students into study groups, predominantly to work on problem sets. Discussion and guidance are permissible. However, you may not copy other students' answers or spreadsheets. The final preparation of the actual answers must be your own. Any use of official course answer sheets, including answers from previous years, is strictly prohibited.

Math Review

In the first week of class, we will have two math review sessions. These sessions are mandatory for anyone who is not comfortable with the material that will be covered. Although this is not a course on mathematics or quantitative methods, you will better understand and formulate many of the intuitive ideas presented in the class with the help of some basic mathematical techniques. In addition, the material covered in these math reviews will be useful groundwork for the problem sets and the final exam. Out assumption is that you have a little or a moderate amount of training in mathematics, but are willing to learn as required.

Session I:

Algebra
and Math Tools:
logarithm and exponents, series and sum of infinite series, difference equations, etc.
(read Part I of R-A, "Notes on Math Basics.")
Probability:sample spaces and events, conditional probabilities, Bayes rules, random variables, probability distribution and density functions (binomial, uniform, normal, etc.)
(read R-B, "Notes on Probability.")

Session 2:

Calculus:functions and derivatives, differential rules, optimization techniques, introductory integral calculus
(read Part II of R-A, "Notes on Math Basics.")
MatricesNotation, matrix operations, determinants and inverse
(read Part IV of R-A, "Notes on Math Basics.")

    Computers

    Some of the material in API-302 is designed to acquaint you with the use of the microcomputer in policy analysis and life. We encourage computer use whenever appropriate. Several of the problems that will appear on the problem sets require, or at least are suited for, the use of a computer.

    You will be expected to master a minimum of skills with a spreadsheet in order to complete the material for the course. You may also be expected to obtain information via the Internet. Each study group will have at least one computer literate individual. Any creative suggestions for utilizing computer software for course purposes are welcome.

    The microcomputers we will be using are located in the computer lab (5-0796) on the ground floor of the Taubman building (room G-33). If you have never used a spreadsheet program, it will be important to set aside two or three hours early in the course to spend in the lab learning how to use one, a skill you will welcome for the rest of your life.

    NYTimes.com

    From time to time, we will draw on current news articles for our class discussions. To facilitate this without breaching copyright laws, it will be important for all students to register with the New York Times on the Internet, so that you will be able to follow links posted on the course Intranet page. To do this, go to www.nytimes.com and hit "Sign Up" (at the top right hand corner of the page). Complete the form, which requires only an email address, your age, and your sex, with a username and password of your choice. Registration is free, and to the best of our knowledge nytimes.com honors its commitment to Internet privacy.

    Chat Room

    API-302 will be experimenting this year with a chat room facility, available on our KSG Intranet course site. Students will be encouraged to engage in online discussion as an adjunct to class participation. A variety of formats will be tried to see how this will work.

    Traditionally, course assistants get inundated with requests for help shortly before problem sets are due. Utilizing the chat room this year, we will have a blackout period, perhaps three days, before a problem set. For that period, all student inquiries relating to the problem set will be taken only via the chat room. This shares information widely, and also assures that any response that could include hints on how to proceed will be available to the whole class. We reserve the right to alter this format during the semester, as we learn about its strengths and weaknesses.

    Previous Work

    Designing this course is somewhat of a challenge, given the varying backgrounds of our students. A number of MPP students took analytics and economics courses last year. Enrollees from the Mid-Career Program are likely to have taken the advanced Analytics Section in the Summer Program. A few of you will be taking the Green/Miller course, "Microeconomic Theory" (API-111) concurrently. These courses contain some of the material that has been taught in API-302 in the past.

    But we are nothing if not flexible. We have tried to develop a curriculum that limits overlap with prior efforts, yet covers relevant materials so students without this prior work will not suffer. As we shall discuss during the course, it is impossible to maximize simultaneously on two dimensions. But we can strive to strike a perfect balance, and we shall so strive.

    First, where some old material is only important, but not essential, we may replace it with some other important topic. Second, for the essential material, we shall ask those who have little background in analytic methods to do a modest amount of background reading in A Primer for Policy Analysis. Third, if one or two holes are discovered as we proceed, our course assistants will hold special review sessions.

    API-302
    Fall 2002
    A-2

    OUTLINE OF CLASSES

    I. Introduction - September 12, 2002

    II. Conceptual Thinking, Modeling, and Optimization (7 Sessions)
    September 17 Probability and Stochastic Processes
    September 19 Simulating Probabilistic Systems, Heterogeneity
    September 24 Modeling Dynamic Systems
    September 26 Constrained Optimization
    October 1 Dynamic Optimization and Resource Economics
    October 3 Queueing
    October 8 Convexity, Well and Ill-Behaved Problems

    III. Uncertainty, Information, and Insurance (6 sessions)
    October 10 through October 29

    IV. Behavioral versus Rational Economics (4 sessions)
    October 31 through November 12

    V. Game Theory, Commitment, Interactive Decision, Social Choice (6 sessions)
    November 14 through December 5

    VI. Organizing Society, Wrapup (2 sessions)
    December 10 through December 12

    VII. Summing Up (1 session)
    December 12

    VIII. Reading Period Assignment (to be announced)

    IX. Examination
    Tuesday, December 17, 2002, (9:00 a.m.-12:00 p.m.)
    (date and time subject to change, room to be announced)
    3-hour Exam some questions may be handed out in advance.


    READING LIST I

    All readings are required unless noted as optional. Readings are indexed as follows:
        R = Reading (usually in CMO packet, sometimes available on-line or on reserve)
        S = Shorter piece (usually on web-site in daily class folders, sometimes distributed in class)
        D = Problems of the Day (usually on web-site in "assignments" folder)

    September 12 – Introduction: Conceptual Thinking and Modeling.

      R-A Ko, "Notes on Math Basics" (In Packet 1: read prior to first Math Review Session)

      R-1 Adams, "Introduction," and "Perceptual Blocks," Chapters 1 and 2, in Conceptual Blockbusting, pp. 1-11, 13-37. (To hand out in class)

      R-3 Schelling, Micromotives and Macrobehavior, Chapters 1 and 2 ("Micromotives and Macrobehavior," and "The Inescapable Mathematics of Musical Chairs") (Book recommended for purchase, and on reserve in KSG library).

      Feynman, "The Relation of Mathematics to Physics," Chapter 2, in The Character of Physical Law, pp. 35-58. (Optional -- on reserve in KSG library)

      Weinberg, Science and Trans-Science, 10 Minerva 209 (1972). (Optional – on reserve)

    Short Articles/Examples: (available on course web-site, in September 12 directory)

      Emergency Room Gridlock: "Emergency crews worry", NYT Dec 17, 2000.

      Deer and/or Forest Fires: "Deer population exploding", USA Today Dec 22, 2000; "Why foresters prefer to fight fire with fire", NYT Aug 20, 2000.

      Guns and Crime: "More guns, less violence", WSJ Aug 4, 2000.


    September 17: Probability and Stochastic Processes (Markov Chains, etc.)

      R-B Pollack, "Notes on Probability" (Read prior to second Math Review Session)

      R-5 *"Markov Chains: Motivational Introduction"

      R-6 *Stokey and Zeckhauser, "Markov Models," Ch. 7, Primer for Policy Analysis, pp. 98-114.

      R-7 "Markov Chains"

      R-7.1 Taylor and Karlin, "An Introduction to Stochastic Modeling", pp. 95-112 (Optional: somewhat more formal and difficult)

      D-1 Problem of the Day: Policy disagreements and different models.
      (submit one paragraph via course website by 5:00 PM, Monday September 16).

    September 19 –Heterogeneity, Simulating Probabilistic Systems

      R-8 Stokey and Zeckhauser, "Simulation," Ch. 6, A Primer for Policy Analysis, pp. 89-97.

      R-9 Hendricks, "Notes on Computer Simulations"

      R-10 *"Marsh and McLennan" (A) (Part B to be distributed in class Sept. 20)

      R-12 Pollack, "Notes on Heterogeneity and Measurement"

      R-13 Bane and Ellwood, "Slipping Into and Out of Poverty: The Dynamics of Spells," Journal of Human Resources, Winter 1986, pp. 1-23.

      R-13.1 Joel E. Cohen, "An uncertainty principle in demography and the unisex issue", The American Statistician 40:1 (Feb 1986), pp. 32-39

      R-14 Zeckhauser, Sato, and Rizzo, "Hidden Heterogeneity in Risk: Evidence from Japanese Mortality," Health Intervention and Population Heterogeneity, Dec 1985, pp. 23-48 (Optional – on reserve)

      Examples/Short Readings: Modeling the AIDS epidemic and potential responses: (on web-site)

        "Forecasting the global AIDS epidemic", Science Aug 23, 1991
        "Imperfect AIDS vaccine still useful", Washington Post Sept 9, 2001
        "Math experts suggest AIDS will be halted", Newsday July 31, 2002.

      Discussion Problem of the Day: D-2. Counting the Children in Katmandu
        (On course web-site. Come prepared to discuss in class, September 19).
    September 24 - Heterogeneity, con't
    Modeling Dynamic Systems
      Examples:
        AIDS and IV drug users:
        Caulkins and Kaplan, "AIDS impact on the number of IV drug users", Interfaces 21:3, pp. 50-63) (On reserve in KSG library)
        Copying Software:
        C. Osorio, "the dynamics of illegal copying", (On web page)
        Copying Music:

      "Giving Away Music to Make Money", at www.firstmonday.dk/issues/issue6_8/pfahl/

        End of Mandatory Retirement for Tenured Faculty (Science, Aug 23, 1991; "Tenure gridlock", NYT Feb 16, 2000)
    September 26 - Modeling Dynamic Systems Continued, Introduction to Optimization

      R-14.1 Steersman, "Business Dynamics Systems Thinking and Modeling for a Complex World", Part II: Tools for Systems Thinking Chapter 5 and Chapter 6

      R-14.2 Forrester, Chapter 1, Principles of Systems, Chapter 1, copyright 1968, Jay Forrester, MIT Press, Cambridge, MA, pp 1-1 to 1-10.

      October 1 - Optimization with Equality and Inequality

        R-15 *"Programmed Exercises on Lagrange Multipliers"

        R-16 Baumol, "Constrained Maxima: Lagrange Multipliers," Chapter 4, Section 8, in Economic Theory and Operations Analysis, pp. 62-67.

        R-16.1 Intriligator, Mathematical Optimization and Economic Theory, Ch. 2 ("the Mathematical Programming Problem") and 3 ("Classical Programming"), pp. 8-39 (Optional)


      October 3 - Resource Economics

        R-17 Pollack and Zeckhauser, "Budgets as Dynamic Gatekeepers," Management Science, May 1996, pp. 642-658.

        R-18 *Solow, "The Economics of Resources or the Resources of Economics," American Economic Review, May 1974, pp. 1-14.

        R-20 *Read, "Deterministic Reservoir Operation: An Application of the Economic Principles," New Zealand Ministry of Energy Report # ER4006.

        R-20.1 Chiang, Dynamic Optimization. pp. 27-45 for Calculus of Variations, Euler equation; pp. 161-181 for Optimal Control, Maximum Principle (Optional)

      October 8: Analytic Queuing

        R-20.2 R.B. Cooper, Introduction to Queuing Theory. Second edition, North-Holland (Elsevier), 1981. Chapter 1, Scope and Nature of Queuing Theory. - in packet

        L. Jean Camp & Carolyn Gideon, "Certainty in Bandwidth or Price" The 29th Research Conference on Communication, Information and Internet Policy, Washington, D.C. October 2000. -on line

        Schwartz textbook on Queuing Theory, Chapter 2. -in reserve



      October 10 - Convexity, Well and Ill-behaved Problems

        C. Phillips and R. Zeckhauser, "Restoring Natural Resources with Destination-Driven Costs," Journal of Environmental Economics and Management 36, 1998, 225-242.

        W. Brian Arthur, "Positive feedbacks in the economy", Scientific American February 1990, p. 92-99.

        W. B. Arthur, "Competing Technologies, Increasing returns and Lock-in by Historical Events", The Economic Journal, Vol. 99, Issue 394, pp116-131. (Optional, on web).

        P. A. David "Clio and the Economics of QWERTY" The American Economic Review Papers and Proceedings, 75:2, May 1985, pp. 332-337 (Optional, on web.)

        Bailey, J., L. McKnight, and P. Bosco. 1997. "The economics of advanced services in an open communications infrastructure: Transaction costs, production costs, and network externalities." Information Infrastructure and Policy, 4: 255-277. ( on web page)

        John R. Pierce and A. Michael Noll, Signals: The Science of Telecommunications, 1990, pp. 1-63 (Chap. 1 "A Grand Dream in a Real World", Chap. 2 "The Beginnings of Electrical Communication", Chap. 3 "Theories of Communication: Fourier to Shannon"). (for background -- on reserve)

        Keohane, Van Roy, and Zeckhauser, "Controlling stocks and flows to promote quality" (Optional, on web page)

        Examples/Short Readings: Helium


          Hammel et al, "The continuing U.S. helium saga", Science, 2/24/84 (on web page)

          Epple and Lave, "Helium Policies," Science. 225, 1984, pp. 784-785. (on web page)

          (updates on "Helium privatization act of 1996" at www.cryogenicsociety.org/csa_bin/ back_issues/fall98.pdf and winter 1998.)

      Unit Two: Uncertainty, Information, and Insurance
      October 15 - Market Equilibrium Under Uncertainty (TP)

        R-25 *J. Hirshleifer, "Preference Under Uncertainty," Chapter 8, in Investment, Interest, and Capital, pp. 215-241.

        R-26 *Hylland and Zeckhauser, "Contingent Claims."


        Examples/Short Readings: Trends in Risks.

          "Fatal accidents are down as U.S. becomes more vigilant", NYT Oct 7, 1990;
          "Accidental deaths on rise as population ages fast", NYT April 26, 2000;
          Current risk data from National Safety Council, at www.nsc.org/library/report2000.htm.

        Reminder: Problem Set #1 is due Friday, October 11, at 12:00 noon, 3rd floor Littauer.
      October 17 - Insurance Markets I

        R-27 Zeckhauser, "Insurance and Catastrophes," Geneva Papers on Risk and Insurance Theory, vol. 20, 1995, pp. 157-175.

        R-28 *Cutler and Zeckhauser, "Reinsurance for Catastrophes and Cataclysms," in The Financing of Catastrophe Risk, Froot, ed., pp. 233-269. (Some of this may be helpful if you decide to write the essay on government reinsurance for terrorism).

        Examples/Short Readings: Insurance Market Meltdowns:


          "Costly Experiment: A Radical Revision of Auto Insurance Backfires in New Jersey," WSJ Jan 17, 1990;

          "A call for 'Auto Choice' and lower premiums", NYT Aug 30, 1998

          "Medical malpractice insurance premiums soar", Pittsburgh Post-Gazette Jan 21, 2001

          "Rise in insurance forces hospitals to shutter wards", NYT Aug 25, 2002.


      October 22 - Insurance Markets I

        R-27 Zeckhauser, "Insurance and Catastrophes," Geneva Papers on Risk and Insurance Theory, vol. 20, 1995, pp. 157-175.

        R-28 *Cutler and Zeckhauser, "Reinsurance for Catastrophes and Cataclysms," in The Financing of Catastrophe Risk, Froot, ed., pp. 233-269. (Some of this may be helpful if you decide to write the essay on government reinsurance for terrorism).

        Examples/Short Readings: Insurance Market Meltdowns:


          "Costly Experiment: A Radical Revision of Auto Insurance Backfires in New Jersey," WSJ Jan 17, 1990;

          "A call for 'Auto Choice' and lower premiums", NYT Aug 30, 1998

          "Medical malpractice insurance premiums soar", Pittsburgh Post-Gazette Jan 21, 2001

          "Rise in insurance forces hospitals to shutter wards", NYT Aug 25, 2002.


        Problem of the Day: D-9, Oregon Health Care Experiment
          (Submit answer on course web page by 5:00 PM, Mon Oct 21)
          "Rationing Health Care", National Journal 6/30/90 (in CMO packet)
          "How's Oregon's bold rationing program doing?" Medical Economics July 28, 1997 (on web page)

      October 24 - Risk and Market Performance

        R-31 Brealey and Meyers, "More About the Relationship between Risk and Return," Chapter 8, in Principles of Corporate Finance, pp. 149-171 (packet).
        Luehrman, "What's it Worth?" Harvard Business Review, May - June, pp. 133- 141 (packet)

        "The CATs are out of the bag", Business Week, January 26, 1998 (On web page)

        K. Froot, "The Evolving market for catastrophic event risk", August 1998 (On web page)

        R-36 Zeckhauser, "The Challenge of Contracting for Technological Information," The Proceedings of the National Academy of Sciences, vol. 93, 1996, pp. 12743-12748 (packet).

        R-47 Scherer and Harhoff, "Technology Policy for a World of Skew-Distributed Outcomes," Research Policy, vol. 29, 2000, pp. 559-566. (Optional, on web page)

      October 29- Insurance Markets II - Health Insurance

        David Cutler, untitled new book, Chapter 8 ("Follow the money") and 9 ("The managed care debacle"), on course website.

        R-29 *Cutler and Zeckhauser, "The Anatomy of Health Insurance," Chapter 11, in The Handbook of Health Economics, Newhouse and Cutler, eds., pp. 563-643. (Optional, posted on web site)

        R-30 David Cutler, "Why Don't Markets Insure Long-Term Risk?" (posted Course Website)

        Examples/Short Readings: Risk Pooling and Equity

          "HMO Rates for women are challenged", NYT Sept 13, 1986.
          "New Jersey's second crisis in insurance: health costs", NYT Feb 15, 1990.
      October 31: Markets, Market Failure, and Government Role in Uncertainty

        R-32 *Arrow, "The Organization of Economic Activity: Issues Pertinent to the Choice of Market versus Nonmarket Allocation," in The Analysis and Evaluation of Public Expenditures, Haveman et al., pp. 47-64. (packet)

        R-33 *Zeckhauser, "Uncertainty and the Need for Collective Action," in The Analysis and Evaluation of Public Expenditures, R. Haveman et al, pp. 149-166. (packet)

        R-35 Kaplow, "Incentives and Government Relief for Risk," Journal of Risk and Uncertainty, vol. 4, no. 2, April 1991, pp. 167-175. (packet)

        R-37 Wells and Gleason, "Is Foreign Infrastructure Investment Still Risky?," Harvard Business Review, September-October 1995, pp. 45-55. (Optional, in packet)

        R-45 Kunreuther, Myer, et al., "High Stakes Decision Making: Normative, Descriptive, and Prescriptive Considerations." (Optional, on Course Website)

        Problem of the Day: D-10. Risk and the Role of Government (on web page)
        (Post answers on course web site by 5:00 PM, Wed Oct. 30).
      IV. BEHAVIORAL VERSUS RATIONAL ECONOMICS

      November 5 - Anomalies and Prospect Theory

        R-38 *Tversky and Kahneman, "Judgment Under Uncertainty: Heuristics and Biases," Science, vol. 185, 1974, pp. 1124-1131. (packet)

        R-39 Tversky and Kahneman, "Rational Choice and the Framing of Decisions," in Rational Choice, Hogarth and Reder, eds., pp. 67-94. (packet)

        R-40 *Zeckhauser, "Behavioral versus Rational Economics: What You See Is What You Conquer," in Rational Choice, Hogarth and Reder, eds., pp. 251-265. (packet)

        "Risk Perception and Decision-Making", Risk Communication and Vaccination: Workshop Summary (1997) Institute of Medicine, National Academies Press (Optional, http://bob.nap.edu/books/0309057906/html/)

        M. G. Morgan , B. Fischhoff , A. Bostrom Risk Communication : A Mental Models Approach pp 1-18, pp 34-62 (Optional, packet)

        Lichtenstein et. al, Judged Frequency of Lethal Events, Journal of Experimental Psychology. Vol 4 No 6, pp 551- 578 (Optional, packet)

      November 7 - Preferences and Rationality

        R-41 Arrow, "Rationality of Self and Others in an Economic System," in Rational Choice, Hogarth and Reder, eds., pp. 201-215. (optional, on reserve)

        R-42 *Elster, "Sour Grapes," Chapter 3, in Sour Grapes, pp. 109-140 (packet)

        R-44 Prelec and Loewenstein, "The Red and the Black: Mental Accounting of Savings and Debt," Marketing Science, vol. 17, no. 1, pp. 4-28. (packet)

        Shapiro, Carl. & Varian, Hal, Information Rules , Harvard Business School Press, (Boston, MA) , c1999 pp. 103-172, 135-172 (reserve)


        Reminder: Problem Set #2 is due Friday, November 8, between 9am - 12:00 noon, Littauer 213.


      November 12 - Risk, Fairness, and Government Intervention: Value of Life and Other Imponderables

        Blomquist,: the Economics of the Value of Life, International Encyclopedia of the Social and Behavioral Sciences, Peragon Press, 2001 (http://gatton.uky.edu/faculty/blomquist/encyclop.pdf)

        R-46 MacLean, "Social Values and the Distribution of Risk," in Values at Risk, pp. 75-93. (packet)

        R-48 Zeckhauser and Viscusi, "The Risk Management Dilemma," Annals AAPSS, vol. 545, May 1996, pp. 144-155. (packet)

        World Bank, The African Capacity Building Initiative: Toward Improved Policy Analysis and Development Management (Washington, D.C.: World Bank, 1991) (packet)

        Committee for Academic Freedom in Africa, "The World Bank's African Capacity Building Initiative: A Critique," CAFA Newsletter 6 (Spring 1994):14-19. (packet)


        Examples/Short Readings:

        S-10 Kaiser, "Should Engineer Witnesses Meet Same Standards as Scientists?" Science, September 11, 1998., vol. 281, p. 1578.

        S-M Readings about Risk: Women's Job Rights; Fatal Accidents; Mammograms; Doomsday Rock; others

        "Let Them Eat Pollution (Excerpt from a Letter Written by the Chief Economist of the World Bank)," The Economist 322 (8 February 1992):66.

        Discussion Problem of the Day: D-11, Policy Implications of Behavioral Research:
        (Come prepared to discuss in class, November 12)

      November 14 - Behavioral Finance

        Zeckhauser, Patel, and Hendricks, "Nonrational Actors and Financial Market Behavior", Theory and Decision 31: 257-287, 1991 (packet)

        Shiller, Robert J., "Bubbles, Human Judgment, and Expert Opinion", Cowles Foundation Discussion Paper No. 1303, May 2001 (packet)

        Kahneman, Daniel and Mark W. Riepe, "Aspects of Investor Psychology", Journal of Portfolio Management, Summer 1998, pp. 52-65 (packet)

        Garber, Peter, "Famous First Bubbles", Journal of Economic Perspectives 4:2, Spring 1990, 35-54 (Optional, in packet)

        R-49 Degeorge, Patel, and Zeckhauser, "Earnings Management to Exceed Thresholds," Journal of Business, vol. 72, no. 1, January 1999, pp. 1-33. (Optional, in packet)

      V. GAME THEORY, COMMITMENT, INTERACTIVE DECISION, SOCIAL CHOICE

      November 19 - Major Concepts in Game Theory

        R-50 Luce and Raiffa, "Extensive and Normal Forms," "Two-Person Non-Zero-Sum Non Cooperative Games," "Side Payments," "Definition of Characteristic Functions," Chapters 3, 5, 8.1, and 8.2, in Games and Decisions, pp. 39-55, 88-113, 180-181, 182-185. (Chapter 4, "Two-Person Zero-Sum Games," pp. 56-87, is optional.) (On reserve)

        R-51 Gibbons, Game Theory for Applied Economists, pp. 1-33, 55-75 (Required, on reserve); pp. 82-102 (optional).

        R-52 Harsanyi, "Advances in Understanding Rational Behavior," in Rational Choice, Elster, ed., pp. 82-107. (Optional, on reserve: A more philosophical discussion of the fundamental issues of game theory, less technical than Luce and Raiffa)

        R-57 Kreps, A Course in Microeconomic Theory, pp. 387-437, 443-449, 463-480 (Optional, on reserve).


      November 21 - Coordination Games, Multi-party Coordination/Cooperation

        R-53 Schelling, The Strategy of Conflict, Ch. 4, "Interdependent Decision." (On reserve.)

        R-54 *Schelling, "Hockey Helmets, Daylight Saving, and Other Binary Choices," Chapter 7, in Micromotives and Macrobehavior, pp. 211-243. (On reserve.)

        R-55 Schelling, "The Retarded Science of International Strategy," "An Essay on Bargaining," "Bargaining, Communication, and Limited War," Chapters 1, 2, and 3, in The Strategy of Conflict, pp. 3-20, 21-52, 53-80. (On reserve)

        Hofstadter, Douglas (1983). "The Prisoner's Dilemma Computer Tournaments and the Evolution of Cooperation". Ch 29, pp. 715-732 in Metamagical Themas. New York: Basic Books, 1986. (packet)

        R-64 Hill, "Mathematical Devices for Getting a Fair Share," American Scientist, July-August 2000, vol. 88, pp. 325-331. (Packet)

        Problem of the Day: D-12, Micromotives and Macrobehavior:
        (Post answers on course web site by 5:00 PM, Wed Nov. 20).

      November 25 - Game Theory Applications: Bidding and Pricing Problems

        R-60 Dixit and Skeath, "Bidding Strategy and Auction Design," Chapter 15, in Games of Strategy, pp. 494-518. This provides a nice, accessible, broad overview. (Packet)

        R-61 Baumol and Sidak, "The Pricing of Inputs Sold to Competitors," Yale Journal on Regulation, vol. 11, no. 171, pp. 171-202. (Packet)

        R-62 Joskow, "Introducing Competition into Regulated Industries: from Hierarchies to Markets in Electricity," Industrial and Corporate Change, vol. 5, 1996, pp. 341-382. (Packet)

        R-63 Laffont and Tirole, "Creating Competition through Interconnection," Journal of Regulatory Economics, vol. 10, 1996, pp. 227-256. (Packet)


      November 28 - Thanksgiving Holiday - No Class

      December 3 - Signaling and Screening

        R-58 Tirole, The Theory of Industrial Organization, pp. 305-337 (Packet)

        R-59 *Spence, "Introduction," "Job Market Signaling," and "Model 2: Education as a Signal," Chapters 1, 2, and 3, in Market Signaling, pp. 1-4, 5-13, 14-30 (Packet).

        R-77 Kuran, "The East European Revolution of 1989: Is It Surprising that We Were Surprised?," American Economic Review, May 1991, 121-125. (Optional, in packet)

        Problem of the Day: D-13, Game Theory Applications
        (Post answers on course web site by 5:00 PM, Mon. Dec. 2).

      December 5 - Game Theory Applications: Agency, Commitment

        R-65 Hansmann, The Ownership of Enterprise, Cambridge, MA: The Belknap Press of Harvard University Press, 1996, pp. 1-49. (On reserve)

        R-66 *Pratt and Zeckhauser, "Principals and Agents: An Overview," Chapter 1, in Principals and Agents, pp. 1-35. (Packet)

        R-67 Arrow, "The Economics of Agency," Chapter 2, in Principals and Agents, pp. 37-51. (Packet)

        R-56 Blackmon and Zeckhauser, "Fragile Commitments and the Regulatory Process," Yale Journal on Regulation, vol. 9, no. 1, Winter 1992, pp. 73-105. (Optional, in packet)

        R-68 Kreps, "Corporate Culture and Economic Theory," in Perspectives on Positive Political Economy, Alt and Shepsle, eds., pp. 90-143. (Optional, on reserve)


        Reminder: Problem Set #3 is due Friday, December 6, 9:00 am -12 noon, 3rd floor Littauer 213.

      December 10 - Game Theory Applications: Reputations and Risk

        P. Resnick and R. Zeckhauser "Trust Among Strangers in Internet Transactions: Empirical Analysis of eBay's Reputation System" The Economics of the Internet and E-Commerce. Ed. M. Baye, editor. Volume 11 of Advances in Applied Microeconomics. Amsterdam, Elsevier Science. 2002. http://www.si.umich.edu/~presnick/papers/ebayNBER/

        Friedman and Resnick "The Social Cost of Cheap Pseudonyms" Journal of Economics and Management Strategy 10:2, 173-199 http://www.si.umich.edu/~presnick/papers/identifiers/

        Accountability, Peer-to-Peer, Harnessing the Power of Disruptive Technologies, O'Reilly & Associates, 2001. Ch 16, 271-340. (on reserve)

        R-57.1 Schelling, Choice and Consequence, pp. 268-290 (Packet).

      VI. ORGANIZING SOCIETY

      We do not expect you to read everything in this section for this class, even if you are ambitious. But these readings take a broad look at a range of societal issues from an analytic standpoint. Reading them will be an appropriate capstone for the course, and reflecting on their major arguments may well help prepare you for some .

      December 12 - Games Society Plays

        R-70 Frank, Choosing the Right Pond, Chapters 1 and 3 (pp. 3-16, 39-63). (On reserve)

        R-71 Frank and Cook, The Winner-Take-All Society Chapter 1 (p. 1-22) (On reserve)

        R-72 *R. Hirschman, Exit, Voice, and Loyalty. Chapters 1, 2, 3, and 8 (pp. 1-20, 21-29, 30-43, 106-119). (On reserve)

        R-76 Banfield, The Moral Basis of a Backward Society, Chapters 1, 2, 5, and 7 (pp. 17-32, 35-42, 83-100, and 123-137). (On reserve)


          This book is the predecessor to Robert Putnam's subsequent work on Italy, and the surge of interest in social capital. Banfield died in October 1999.

          Discussion Problem of the Day: D-14, Exit and Voice.
          (Come prepared to discuss in class on Wednesday, December 12).


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