040044 VK Stochastic Methods in Economics (MA) (2014W)

The purpose of this course is to introduce students to stochastic methods in economics. In most of perceived economic theory, elements of chance are unavoi-dable to provide robust and accurate models for real-world phenomena. A sound knowledge of the technical aspects of this literature is necessary for students in order to be able to follow this literature and helps them in expressing their own ideas. After completing this class the student will have a rough idea of the relevant techniques.

The following topics will be covered in the lecture:
- Elements of Probability theory

- Markov processes.
- Applications:
Markov Decision processes (Dynamic Programming)
Stochastic and Repeated Games
Evolution and Learning dynamics
Contract Theory

- Stochastic Calculus (eventually)
Brownian Motion, Ito Calculus.
- Applications:
The Holmstrom-Milgrom and the Sannikov Model in Principal-Agent Theory

Prerequisites:
The student should be familiar with the concept of probability (as taught in typical statistics classes for undergraduates), analysis (integral and differential calculus), and decision theory. Knowledge of basic game theory (Strategies, Nash equilibrium) and microeconomics are also very useful.