Information Economics by Urs Birchler and Monika Butler


This new text book by Urs Birchler and Monika Butler is an introduction to the study of how information affects economic relations. The authors provide a narrative treatment of the more formal concepts of Information Economics, using easy to understand and lively illustrations from film and literature and nutshell examples.
The book first covers the economics of information in a 'man versus nature' context, explaining basic concepts like rational updating or the value of information. Then in a 'man versus man' setting, Birchler and Butler describe strategic issues in the use of information: the make-buy-or-copy decision, the working and failure of markets and the important role of outguessing each other in a macroeconomic context. It closes with a 'man versus himself' perspective, focusing on information management within the individual.

     Preface p. xxi
       Why study information economics? p. 1
       How to use this book p. 5
          The purpose of the book p. 5
          Ways of reading the book p. 6
          The structure of the book p. 8
          Using the book for teaching p. 8
          Solutions to problem sets and other supporting material p. 9
    Information as an economic good p. 11
       What is information? p. 13
          Introduction p. 13
          Main ideas: The strangest good of all p. 14
          Theory: Describing, comparing and updating information p. 17
          Conclusions and further reading p. 26
          Problem sets: Medical and financial testing p. 27
       The value of information p. 31
          Introduction p. 31
          Main ideas: The source(s) of information value p. 32
          Theory: Knowledge is power p. 37
          Application: The resolution of uncertainty p. 50
          Application: The informational cost of mediocrity p. 53
          Conclusions and further reading p. 56
          Problem sets: Precious advice p. 56
       The optimal amount of information p. 61
          Introduction p. 61
          Main ideas: Is it worth the cost? p. 62
          Theory: Deciding at the margin p. 63
          Application: The central bank's inflation forecast p. 67
          Application: Search p. 70
          Conclusions and further reading p. 79
          Problem sets: Paying, searching, and waiting for information p. 80
       The production of information p. 83
          Introduction p. 83
          Main Ideas: Too little research or too much? p. 86
          Theory: The incentive to innovate p. 88
          Application: Creative destruction p. 97
          Application: Rating agencies p. 105
          Application: Why are banks supervised? p. 107
          Conclusions and further reading p. 109
          Problem sets: Produce or copy-sell or give away? p. 110
    How the market aggregates information p. 115
       From information to prices p. 117
          Introduction p. 117
          Main ideas: Revealing information through prices p. 118
          Theory: The market as an information processor p. 121
          Application: Terrorism futures and prediction markets p. 135
          Application: Should bank supervisors look at market prices? p. 137
          Conclusions and further reading p. 142
          Problem sets: Two heads know more than one p. 143
       Knowing facts or reading thoughts? p. 145
          Introduction p. 145
          Main ideas: Fundamental versus strategic uncertainty p. 146
          Theory: Higher-order information p. 148
          Application: Keynes in the lab p. 162
          Application: Conformism and learning from debate p. 165
          Application: Betrayals and mediation p. 167
          Conclusions and further reading p. 169
          Problem sets: The art of outguessing others p. 171
       Coordination problems p. 173
          Introduction p. 173
          Main ideas: Red or white? p. 174
          Theory: Coordination and multiple equilibria p. 180
          Application: Bank runs p. 190
          Conclusions and further reading p. 200
          Problem sets: "Should I stay or should I go?" p. 201
       Learning and cascades p. 203
          Introduction p. 203
          Main ideas: "Always stand at the longest queue" p. 205
          Theory: Observational learning p. 207
          Application: Learning in repeated games p. 221
          Conclusions and further reading p. 224
          Problem sets: A bath in the crowd p. 224
       The macroeconomics of information p. 227
          Introduction p. 227
          Main ideas: Who acquires information and why? p. 228
          Theory: Information is imperfect and costly p. 232
          Application: Central bank transparency p. 245
          Conclusions and further reading p. 248
          Problem sets: As time goes by p. 249
    Asymmetric information p. 253
       The winner's curse p. 255
          Introduction p. 255
          Main ideas: How to lose by winning p. 257
          Theory: The importance of conditional expectations p. 260
          Application: The underpricing of IPOs p. 266
          Application: Prices and the winner's curse p. 269
          Conclusions and further reading p. 270
          Problem sets: Cursing winners p. 271
       Information and selection p. 273
          Introduction p. 273
          Main ideas: When information prevents trading p. 274
          Theory: The market for lemons p. 277
          Application: The insurance destruction effect p. 286
          Application: Annuities p. 293
          Conclusions and further reading p. 300
          Problem sets: Buying the cat in a bag p. 302
       Optimal contracts p. 305
          Introduction p. 305
          Main ideas: The economic lie detector p. 307
          Theory: Optimal contracts p. 312
          Application: Price-quality discrimination p. 322
          Application: Subordinated debt p. 328
          Conclusions and further reading p. 334
          Problem sets: Deal or no deal? p. 335
       The revelation principle p. 341
          Introduction p. 341
          Main ideas: Many lies, one truth p. 342
          Theory: The relevation principle p. 343
          Application: The debt contract p. 349
          Application: Auctions p. 356
          Application: Why Enron should not have happened p. 360
          Conclusions and further reading p. 362
          Problem sets: Know your value p. 364
       Creating incentives p. 367
          Introduction p. 367
          Main ideas: Delegation and moral hazard p. 369
          Theory: Incentive contracts p. 371
          Application: Bank deposit insurance and risk taking p. 381
          Application: Credence goods p. 389
          Conclusions and further reading p. 395
          Problem sets: Getting things done p. 397
    The economics of self-knowledge p. 401
       Me, Myself, and I p. 403
          Introduction p. 403
          Main ideas: Contracting with oneself p. 404
          Theory: Intertemporal choice and self-management p. 411
          Application: Soft paternalism p. 425
          Conclusions and further reading p. 428
          Problem sets: Tomorrow I will p. 430
    Notes p. 433
    Bibliography p. 439
    Index p. 449