Information Economics

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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.

This book also comes with a supporting website (, maintained by the authors.

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Editorial Reviews

From the Publisher
"If you teach advanced undergraduate microeconomics, you should be interested in this book. Birchler and Buetler have served up something genuinely novel and substantive here." - Matthew Ryan, New Zealand Economic Papers
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Product Details

Meet the Author

Urs Birchler is Director at the Swiss National Bank and a former member of the Basel Committee on Banking Supervision. He has taught at the universities of Zurich, Berne, St. Gallen and Leipzig.

Monika Butler is Professor of Economics and Public Policy at the University of St. Gallen, CESifo Fellow and CEPR affiliate.

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Table of Contents

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