Timothy Van Zandt


Introduction to the Economics of Uncertainty and Information

I have an incomplete manuscript on the economics of uncertainty and information, which when complete will be a textbook for advanced undergraduate courses on this topic, and will be published by Oxford University Press. The text may also interest economics masters and Ph.D. students in search of an initial low-tech introduction to this topic. Finally, it can be a good supplementary text for courses in finance. It contains the only elementary exposition of the state-pricing approach to asset markets that I know of. This page only contains a description of the book. Send me email if you want more information or are interested in using the notes for a course.

Overview

The book currently has the following chapters:

  1. Introduction to decision theory
  2. Lotteries and objective expected utility
  3. States of nature and subjective expected utility
  4. Choosing when there is new information
  5. Risk preferences
  6. Market decisions in the presence of risk
  7. Markets for state-contingent contracts
  8. Asset markets
  9. Contracting with hidden actions
  10. Monopolistic screening with hidden valuations
  11. Screening with adverse selection
  12. Hidden information after contracting
  13. Signaling
  14. Long-erm versusu short-term contracting

Note that this is not a game theory text. Instead, it begins with an extensive treatment of individual decision making, risk and markets for sharing risks. The second half is devoted to asymmetric information, which may overlap with some game theory texts.

The book does not use advanced mathematics, beyond single-variable calculus (with very little integration). However, the emphasis is on careful and formal modeling. The book is good preparation for graduate school, but this is not the main goal of the book. It is instead directed towards the broader audience that I have had in my course. My goal is to enable the students to use formal modeling as a way to reason carefully about economic situations in which there is uncertainty and asymmetric information.

Current state of the manuscript

Besides being incomplete, the manuscript has some errors and inconsistencies. However, it is usable ``as is''.