Information economics

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.nbsp;

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.nbsp; It closes with a 'man versus himself' perspective, focusing on information management within the individual.

This book also comes with a supporting website (www.alicebob.info), maintained by the authors.

Author Notes

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 Professornbsp;of Economics and Public Policy at the University of St. Gallen, CESifo Fellow and CEPR affiliate.

List of figures	p. xii
List of tables	p. xiv
List of boxes	p. xv
List of problem sets	p. xvii
Preface	p. xxi
1 Why study information economics?	p. 1
2 How to use this book	p. 5
2A The purpose of the book	p. 5
2B Ways of reading the book	p. 6
2C The structure of the book	p. 8
2D Using the book for teaching	p. 8
2E Solutions to problem sets and other supporting material	p. 9
Part I Information as an economic good	p. 11
3 What is information?	p. 13
3A Introduction	p. 13
3B Main ideas: The strangest good of all	p. 14
3C Theory: Describing, comparing and updating information	p. 17
3D Conclusions and further reading	p. 26
3E Problem sets: Medical and financial testing	p. 27
4 The value of information	p. 31
4A Introduction	p. 31
4B Main ideas: The source(s) of information value	p. 32
4C Theory: Knowledge is power	p. 37
4D Application: The resolution of uncertainty	p. 50
4E Application: The informational cost of mediocrity	p. 53
4F Conclusions and further reading	p. 56
4G Problem sets: Precious advice	p. 56
5 The optimal amount of information	p. 61
5A Introduction	p. 61
5B Main ideas: Is it worth the cost?	p. 62
5C Theory: Deciding at the margin	p. 63
5D Application: The central bank's inflation forecast	p. 67
5E Application: Search	p. 70
5F Conclusions and further reading	p. 79
5G Problem sets: Paying, searching, and waiting for information	p. 80
6 The production of information	p. 83
6A Introduction	p. 83
6B Main Ideas: Too little research or too much?	p. 86
6C Theory: The incentive to innovate	p. 88
6D Application: Creative destruction	p. 97
6E Application: Rating agencies	p. 105
6F Application: Why are banks supervised?	p. 107
6G Conclusions and further reading	p. 109
6H Problem sets: Produce or copy-sell or give away?	p. 110
Part II How the market aggregates information	p. 115
7 From information to prices	p. 117
7A Introduction	p. 117
7B Main ideas: Revealing information through prices	p. 118
7C Theory: The market as an information processor	p. 121
7D Application: Terrorism futures and prediction markets	p. 135
7E Application: Should bank supervisors look at market prices?	p. 137
7F Conclusions and further reading	p. 142
7G Problem sets: Two heads know more than one	p. 143
8 Knowing facts or reading thoughts?	p. 145
8A Introduction	p. 145
8B Main ideas: Fundamental versus strategic uncertainty	p. 146
8C Theory: Higher-order information	p. 148
8D Application: Keynes in the lab	p. 162
8E Application: Conformism and learning from debate	p. 165
8F Application: Betrayals and mediation	p. 167
8G Conclusions and further reading	p. 169
8H Problem sets: The art of outguessing others	p. 171
9 Coordination problems	p. 173
9A Introduction	p. 173
9B Main ideas: Red or white?	p. 174
9C Theory: Coordination and multiple equilibria	p. 180
9D Application: Bank runs	p. 190
9E Conclusions and further reading	p. 200
9F Problem sets: "Should I stay or should I go?"	p. 201
10 Learning and cascades	p. 203
10A Introduction	p. 203
10B Main ideas: "Always stand at the longest queue"	p. 205
10C Theory: Observational learning	p. 207
10D Application: Learning in repeated games	p. 221
10E Conclusions and further reading	p. 224
10F Problem sets: A bath in the crowd	p. 224
11 The macroeconomics of information	p. 227
11A Introduction	p. 227
11B Main ideas: Who acquires information and why?	p. 228
11C Theory: Information is imperfect and costly	p. 232
11D Application: Central bank transparency	p. 245
11E Conclusions and further reading	p. 248
11F Problem sets: As time goes by	p. 249
Part III Asymmetric information	p. 253
12 The winner's curse	p. 255
12A Introduction	p. 255
12B Main ideas: How to lose by winning	p. 257
12C Theory: The importance of conditional expectations	p. 260
12D Application: The underpricing of IPOs	p. 266
12E Application: Prices and the winner's curse	p. 269
12F Conclusions and further reading	p. 270
12G Problem sets: Cursing winners	p. 271
13 Information and selection	p. 273
13A Introduction	p. 273
13B Main ideas: When information prevents trading	p. 274
13C Theory: The market for lemons	p. 277
13D Application: The insurance destruction effect	p. 286
13E Application: Annuities	p. 293
13F Conclusions and further reading	p. 300
13G Problem sets: Buying the cat in a bag	p. 302
14 Optimal contracts	p. 305
14A Introduction	p. 305
14B Main ideas: The economic lie detector	p. 307
14C Theory: Optimal contracts	p. 312
14D Application: Price-quality discrimination	p. 322
14E Application: Subordinated debt	p. 328
14F Conclusions and further reading	p. 334
14G Problem sets: Deal or no deal?	p. 335
15 The revelation principle	p. 341
15A Introduction	p. 341
15B Main ideas: Many lies, one truth	p. 342
15C Theory: The relevation principle	p. 343
15D Application: The debt contract	p. 349
15E Application: Auctions	p. 356
15F Application: Why Enron should not have happened	p. 360
15G Conclusions and further reading	p. 362
15H Problem sets: Know your value	p. 364
16 Creating incentives	p. 367
16A Introduction	p. 367
16B Main ideas: Delegation and moral hazard	p. 369
16C Theory: Incentive contracts	p. 371
16D Application: Bank deposit insurance and risk taking	p. 381
16E Application: Credence goods	p. 389
16F Conclusions and further reading	p. 395
16G Problem sets: Getting things done	p. 397
Part IV The economics of self-knowledge	p. 401
17 Me, Myself, and I	p. 403
17A Introduction	p. 403
17B Main ideas: Contracting with oneself	p. 404
17C Theory: Intertemporal choice and self-management	p. 411
17D Application: Soft paternalism	p. 425
17E Conclusions and further reading	p. 428
17F Problem sets: Tomorrow I will	p. 430
Notes	p. 433
Bibliography	p. 439
Index	p. 449

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