Search Theory (Edouard Challe)

This course provides an introduction to Search theory and some of its applications to labor markets,
monetary transactions, and asset markets. Students will learn how to characterise the behaviour of
individual agents (e.g., job seekers) in a market with search frictions, and how these choices aggregate
to determine (potentially inefficient) macroeconomic outcomes. Alternative price and wage setting
mechanisms (i.e., posting versus bargaining) will be considered.

Topics covered:
• Basic job search
• Equilibrium search and endogenous wage dispersion
• Job creation and the Diamond-Mortensen-Pissarides model
• Competitive search
• Money search, OTC markets

Grading: Problem sets (10%) and final exam (90%)


Incomplete Markets (Alexander Monge-Naranjo)

This course covers the basic dynamic models of incomplete markets that must be familiar to all research
economists, not just those doing macro. In the first lecture, we overview the different directions that we
can take to incorporate contractual frictions and incompleteness in financial markets. In the following
three lectures develop the baseline dynamic incomplete markets model. We start by characterizing the
individual’s optimization problems and then derive some of the key general equilibrium implications. We
then sketch a few extensions, including models with aggregate fluctuations and models with equilibrium
default. The ensuing three lectures and part of five, are devoted to recursive contracts in the presence of
limited commitment or private information problems. Again, we discuss the implications for individual
dynamics and for the cross-section of agents. A number of leading examples and applications will be used.
If time permits,we will also discuss the design of optimal government policy, with and without commitment.

Topics covered:
• Sketch of computational methods
• Incomplete markets in GE: Aiyagari/Bewley/Huggett
• Incomplete markets with default
• One-sided limited commitment
• Two-sided limited commitment and moral hasard

Grading: Problem sets (30%) and final exam (70%)