Gorman Lectures in Economics

"Lars Peter Hansen, Co-Winner of the 2013 Nobel Prize in Economics" "Thomas J. Sargent, Winner of the 2011 Nobel Prize in Economics" Lars Peter Hansen is the David Rockefeller Distinguished Service Professor at the University of Chicago, where he is also the research director of the Becker Friedman Institute. Thomas J. Sargent is professor of economics at New York University and a senior fellow at the Hoover Institution at Stanford University. His books include Rational Expectations and Inflation and The Conquest of American Inflation (both Princeton). Hansen and Sargent are the coauthors of Robustness (Princeton). Sargent was awarded the Nobel Prize in economics in 2011 and Hansen received it in 2013. A guide to the economic modeling of household preferences, from two leaders in the field A common set of mathematical tools underlies dynamic optimization, dynamic estimation, and filtering. In Recursive Models of Dynamic Linear Economies, Lars Peter Hansen and Thomas Sargent use these tools to create a class of econometrically tractable models of prices and quantities. They present examples from microeconomics, macroeconomics, and asset pricing. The models are cast in terms of a representative consumer. While Hansen and Sargent demonstrate the analytical benefits acquired when an analysis with a representative consumer is possible, they also characterize the restrictiveness of assumptions under which a representative household justifies a purely aggregative analysis. Hansen and Sargent unite economic theory with a workable econometrics while going beyond and beneath demand and supply curves for dynamic economies. They construct and apply competitive equilibria for a class of linear-quadratic-Gaussian dynamic economies with complete markets. Their book, based on the 2012 Gorman lectures, stresses heterogeneity, aggregation, and how a common structure unites what superficially appear to be diverse applications. An appendix describes MATLAB programs that apply to the book's calculations. "This book is chock full of results that will be useful to all interested in dynamic linear models, including material that will be novel to even the experienced macroeconomist. Buy it, read it, use it."---Kenneth D. West, Journal of Economic Literature "This is the ideal book for those who want to study, understand, and work with linear-quadratic dynamic economies. Providing a thorough, authoritative, yet accessible treatment, it contains a superb analysis of the connections between various linear-quadratic dynamic programming problems, the general equilibrium properties of these economies, the type of aggregation applicable to them, and the time-series implications for quantities and prices. A great book by two giants of the field."-Fernando Alvarez, University of Chicago "In this tour-de-force of modern macroeconomics, Hansen and Sargent have written the definitive text on linear-quadratic economies that illustrate the connection between preferences and technology and the appropriate time-series representation. This gem of a book not only provides a thorough review of mathematical methods and related computational issues, but also includes cutting-edge economic models. It will be the required reference for anybody who works in modern dynamic macroeconomic problems."-Rodolfo E. Manuelli, Washington University in St. Louis "Modern macroeconomics relies on dynamic equilibrium modeling and the statistical analysis of time-series data. This superb book teaches both techniques hands-on. It guides readers towards mastering a library of computer programs that work for many practical problems, a library that readers will then build on in their own macroeconomic research."-Martin Schneider, Stanford University "It is nearly impossible to think of a better set of coauthors for this subject. I read their superior book with great pleasure and learned much from it."-Jesus Fernandez-Villaverde, University of Pennsylvania "Drawing strong connect

Ken Binmore is a mathematician turned economist and philosopher. He has held chairs at the London School of Economics and Political Science as well as other universities, and is professor emeritus of economics at University College London. His recent books include Natural Justice, Does Game Theory Work?, and A Very Short Introduction to Game Theory. It is widely held that Bayesian decision theory is the final word on how a rational person should make decisions. However, Leonard Savage--the inventor of Bayesian decision theory--argued that it would be ridiculous to use his theory outside the kind of small world in which it is always possible to "look before you leap." If taken seriously, this view makes Bayesian decision theory inappropriate for the large worlds of scientific discovery and macroeconomic enterprise. When is it correct to use Bayesian decision theory--and when does it need to be modified? Using a minimum of mathematics, Rational Decisions clearly explains the foundations of Bayesian decision theory and shows why Savage restricted the theory's application to small worlds. The book is a wide-ranging exploration of standard theories of choice and belief under risk and uncertainty. Ken Binmore discusses the various philosophical attitudes related to the nature of probability and offers resolutions to paradoxes believed to hinder further progress. In arguing that the Bayesian approach to knowledge is inadequate in a large world, Binmore proposes an extension to Bayesian decision theory--allowing the idea of a mixed strategy in game theory to be expanded to a larger set of what Binmore refers to as "muddled" strategies. Written by one of the world's leading game theorists, Rational Decisions is the touchstone for anyone needing a concise, accessible, and expert view on Bayesian decision making. "This short, ambitious book is intended to appeal to the presumed curiosity of economists, statisticians, and philosophers as to what constitutes rationality in scientific induction. Binmore, a game theorist aware of the daunting complexity of his subject matter for nonspecialists, has gone to great pains in making his work accessible, even offering marginal symbols to indicate the substantial portions of the text best avoided by readers lacking the author's appetite for mathematical data." "Rational Decisions contains a wealth of stimulating arguments and thought-provoking claims. It would be an excellent text for an advanced seminar in decision theory, particularly for students with a solid technical background. And no economist, philosopher or political scientist seriously interested in theories of rational decision-making can afford to ignore Binmore's controversial and iconoclastic claims."---José Luis Bermúdez, Economics and Philosophy "[T]he book constitutes an interesting contribution to this area of research rewarding for philosophers, economists, psychologists, and mathematicians alike."---Reinhard Slick, Mathematical Reviews "It is an original and stimulating book. I enjoyed it very much, and expect that you may too."---Brian Skyrms, British Journal for Philosophy of Science "Ken Binmore is one of our deepest thinkers on the foundations of economics and game theory. Here he gives us his personal take on standard decision theory and his own extension of the theory to the case in which decision makers cannot assign unambiguous probabilities to future events. This book will be of considerable interest to economists and philosophers alike."-Eric Maskin, Nobel Prize-winning economist "Strong on ideas and opinions but low on jargon, this is one of the most lively discussions of the strengths and limitations of the Bayesian approach to decision making that I have ever come across. Clearly and strongly argued, controversial, and a pleasure to read."-Riccardo Rebonato, author of The Plight of the Fortune Tellers "Ken Binmore's new book on rational decisions is a superb up-to-date introduction to the now

Avinash K. Dixit is John J. F. Sherrerd '52 University Professor of Economics at Princeton University. He is the author or coauthor of nine books, including Investment under Uncertainty (Princeton), Thinking Strategically (Norton), Games of Strategy (Norton), and The Making of Economic Policy (MIT). How can property rights be protected and contracts be enforced in countries where the rule of law is ineffective or absent? How can firms from advanced market economies do business in such circumstances? In Lawlessness and Economics, Avinash Dixit examines the theory of private institutions that transcend or supplement weak economic governance from the state. In much of the world and through much of history, private mechanisms--such as long-term relationships, arbitration, social networks to disseminate information and norms to impose sanctions, and for-profit enforcement services--have grown up in place of formal, state-governed institutions. Even in countries with strong legal systems, many of these mechanisms continue under the shadow of the law. Numerous case studies and empirical investigations have demonstrated the variety, importance, and merits, and drawbacks of such institutions. This book builds on these studies and constructs a toolkit of theoretical models to analyze them. The models shed new conceptual light on the different modes of governance, and deepen our understanding of the interaction of the alternative institutions with each other and with the government's law. For example, one model explains the limit on the size of social networks and illuminates problems in the transition to more formal legal systems as economies grow beyond this limit. Other models explain why for-profit enforcement is inefficient. The models also help us understand why state law dovetails with some non-state institutions and collides with others. This can help less-developed countries and transition economies devise better processes for the introduction or reform of their formal legal systems. "[In a] broad field that is by its very nature multidisciplinary, Lawlessness and Economics is very straightforward and comprehensive in its survey of this emerging and complex phenomenon. . . . Perhaps the most compelling attribute of this endeavor is Dixit's tenacious ability to place each section and his various models into a clear and precise context with the already vast literature."---Wesley T. Milner, Law and Politics Book Review "Concise yet comprehensive, Professor Dixit's work may well become an essential handbook for this rapidly developing field of study." "Policy-oriented or not, scholars hoping to make a contribution in the area of governance in less developed countries would do well to begin with this brilliant book."---James E. Rauch, Journal of Economic Literature "Avinash Dixit, a superb economist at the very peak of his profession, is one of the best-qualified economists in the world to write this book. With exceptional clarity he develops an elegant model of the scope of informal governance, one that will be indispensable for economists working in this area and for some political scientists as well."-James E. Rauch, University of California, San Diego "A major contribution to the field. Avinash Dixit provides an accessible and well-written overview of a sort not previously available in book form, integrating theoretical and empirical findings and developing new aspects of the issue."-Avner Greif, Stanford University "This extremely well written book presents a lucid and comprehensive survey of a new field in economics, namely the study of exchange, contracts, and property rights enforcement in the absence of a benevolent state. Besides providing a clear picture of the existing literature, it raises interesting questions in a coherent framework-pointing to exciting new avenues of research."-Oriana Bandiera, London School of Economics