Risk and uncertainty are pervasive features of economic decisions and outcomes. Individuals face risk about health status and future job prospects. For a firm, developing new products is risky; furthermore, once a product has been developed, the firm faces product liability risk if it turns out to be unsafe. Investment decisions–from managing a portfolio to starting a business–are also fraught with uncertainty. Some risks are environmental–both manmade problems and natural disasters; other risks include the possibility of terrorist attack and, more locally, issues of campus safety. This tutorial explores both the private market responses to risk (e.g., financial markets, insurance markets, private contracting, and precautionary investments and saving) and government policies towards risk (e.g., regulation, taxation, and the legal system). From a theoretical standpoint, the course will build on expected utility theory, diversification, options valuation, principal-agent models, contract theory, and cost-benefit analysis. We will apply these tools to a wide variety of economic issues such as the ones listed above. One goal of the course is to discover common themes across the disparate topics. Students will be expected to read and synthesize a variety of approaches to risk and uncertainty and apply them to various issues.
The Class: Format: tutorial; students will meet with the instructor in pairs in each week
Requirements/Evaluation: each student will write a paper (or do a short project) every other week, and comment on his or her partner's work in the other weeks; the final two weeks will be reserved for applied projects of the student's choice
Extra Info: one of the papers during the term will be revised to reflect feedback from the instructor and the student's partner
Extra Info 2: may not be taken on a pass/fail basis
Prerequisites: ECON 251, 252, and ECON 253 or 255
Enrollment Preferences: senior Economics majors
Distributions: Division II