Mathematical Economics III

2019-2020

Course Objective

After this course the students:
-can apply theories and methods learned in Math.Econ. I and II to
analyze situations of interaction between different decision makers in
economic systems;
-gain a deeper knowledge of economic behavior and allocation in economic
organizations;
-are able to critically discuss theoretical results in the context of
economic problems,
-are able to apply and choose the appropriate tools for specific
decision problems in economics and OR: use complex tools when necessary
but use simple tools when these are sufficient;
-are able to design mechanisms and compute solutions for economic
behavior and decision making situations such as auctions and identifying
the most influential terrorists in a terrorist network;
-are able to read the scientific literature, and write a short paper or
research proposal.

Course Content

The focus of this course is to apply recent developments in Mathematical
Economics to analyze complex systems with the purpose of understanding
these systems and being able to make better decisions in economic
decision problems. The course will be organized along the following two
main themes: (i) Auctions, and (ii) Games and networks. These topics
will be taught as separate modules of three weeks each.

Organizations in society and economics become more complex and it
requires advanced knowledge of and skills in applying models of decision
making in complex economic systems. For example, auctions of radio
frequencies, 4G networks, gas station locations along highways etc.
require sufficient knowledge of auction theory and mechanism design.
Another example is that markets become less anonymous and networks of
CEO’s and customer networks become more and more important. Also, with
sites as eBay, the internet is growing as an economic system of trade.

Analyzing complex economic systems requires not only knowledge of
various theories and methods of economic behavior and economic
organizations, but also to be able to combine different theories and
methods in an appropriate way. The part on Games and Networks builds on
the knowledge of Mathematical Economics 1 (individual, interactive and
collective decision making) and Mathematical Economics 2 (cooperative
games and networks), and discusses topics that combine different
theories and methods studied before. We do not only give attention to
how these concepts can be applied, but also how specific applications
require modifications of these concepts. An example is finding the most
influential terrorist in a terrorist network where typically the most
important terrorists communicate as little as possible, while in a
facebook network influential agents use many many links. Typical topics
that will be discussed are auction games, systemic risk in financial
networks, strategic foundations of cooperative game solutions, games and
subjective beliefs, and river water allocation problems.
Attention will be given to behavioral, game theoretic as well as
computational aspects.

The other part of the course is devoted to Auction Theory. The approach
to Auction Theory shifted from game theory to the design of auctions,
called mechanism design and three of its pioneers were awarded the 2007
Nobel-prize in Economics. Nowadays, many consultancy companies
specialize in auctions, e.g. TWS-Partners.com, and large multinationals
have specialized in-house divisions e.g. Philips Negotiation Lab. In
auctions, the focus is on private information held by bidders, bidding
strategies, seller’s revenue and efficiency. Critical assumptions
underlying a successful mechanism design approach, inducing competition
among bidders in an unequal playing field, the econometrics of
first-prize auctions, jump bids in take-over battles in financial
markets and some challenging mathematical techniques will be discussed
also. The empirically observed declining price anomaly in sequentially
held auctions touches upon behavioral economics, and can be dealt in
practice with by holding simultaneous auctions, as successfully applied
in the US spectrum auctions (see Wikipedia). A guest lecture will be
given by a practitioner of auctions and/or auction design. This part
will be examined with a case study in which you are asked to design for
example auctions to sell licenses for gas stations along highways, or
asked to develop a bidding strategy for a telecom company in a 5G
spectrum auction.

Using recent literature, developments in economic behavior and
organizations will be studied, and students will play an active role,
for example by writing short research proposals.

Teaching Methods

Lectures, Tutorials

Method of Assessment

Written exam, Home assignments

Literature

Will be announced in the Course Manual and on Canvas.

Target Audience

Third year bachelor students Econometrics and OR
International Exchange students with a quantitative interest (for
information contact J.R. van den Brink, email: j.r.vanden.brink@vu.nl)

Recommended background knowledge

Analysis I and II, Linear Algebra, Probability Theory, Mathematical
Economics I and II, and to a lesser extent Statistics and Programming.

General Information

Course Code E_EOR3_ME3
Credits 6 EC
Period P4
Course Level 300
Language of Tuition English
Faculty School of Business and Economics
Course Coordinator prof. dr. J.R. van den Brink
Examiner prof. dr. J.R. van den Brink
Teaching Staff prof. dr. J.R. van den Brink
dr. H.E.D. Houba

Practical Information

You need to register for this course yourself

Last-minute registration is available for this course.

Teaching Methods Seminar, Lecture
Target audiences

This course is also available as: