Economic Theory (Courses of Study)

All Economic Reasearch, whether abstract or applied, and all economic policy advice is rooted in economic theory. Substantial advances in economic science are usually based on new ways of thinking about and modeling economic phenomena. MIT’s commitment to economic theory is strong, and is facilitated by a close collaboration between faculty members and students developing new theoretical insights, those performing empirical research, and those who are interested in framing public policy. Most of the MIT faculty members who work in economic theory also have serious research and teaching interests in one or more applied fields.

Many members of the MIT Economics Department faculty teach courses in economic theory, either as part of the core curriculum for graduate students, as graduate electives, or at the undergraduate level.

MIT faculty members are currently carrying out theoretical research that bears on both microeconomics as well as macroeconomics. The range of current theoretical research projects is extraordinary. Abhijit Banerjee has worked on social learning and evolutionary game theory. His seminal research on “herd behavior” has proved very influential in areas ranging from price competition among firms to the behavior of prices in financial markets. Peter Diamond is examining the theoretical underpinnings of social insurance systems, with the goal of providing new insight on practical issues of policy design. Glenn Ellison, Sergei Izmalkov, and Muhamet Yildiz specialize in game theory and decision theory. Ellison’s primary focus has been on how societies might develop social norms for strategic interaction. He has developed new abstract models and discussed potential applications, including norms for academic publishing. Izmalkov works on the economic analysis of auction models. Yildiz is an expert on games of incomplete information and has written on delays and breakdowns in bargaining. Robert Gibbons focuses on the economics of organizations. He has most recently worked on relational contracts and trust as determinants of firm boundaries and firm organization. Bengt Holmström is a contract theorist. His seminal work on career concerns and the difficulties of providing incentives to teams and in complex environments has played a fundamental role in shaping the modern theory of the firm. In addition to these Economics faculty, Richard Holden and Drazen Prelec of the Sloan School are actively involved in research and teaching on the economics of organizations, and psychology and economics, respectively.

The MIT Economics Department is fortunate to have long-term visiting faculty arrangements with three world-class economic theorists, Mathias Dewatripont, Ernst Fehr, and Jean Tirole, who spend a substantial period of time at MIT each year. Dewatripont, who is also affiliated with the European Centre for Advanced Research in Economics at the Université Libre de Bruxelles and whose research focuses on contract theory and modern applications of game theory, frequently teaches in the core microeconomic theory sequence. Fehr, a renowned experimental economist, studies the influence of fairness and reciprocity on individual behavior. He teaches a class on experimental economics each fall. Jean Tirole, an internationally acclaimed scholar who has worked in game theory, industrial organization, regulation, and many other fields, typically lectures in MIT’s industrial organization courses. Tirole is also a frequent summer visitor. He offers mini-courses on specialized topics in economic theory. These courses are very popular with graduate students in all stages of the Ph.D. program.

Economic theory is part of the basic undergraduate microeconomics sequence at MIT. Because MIT undergraduates have a good command of mathematical methods, and because economic theory relies on formalism and mathematical analysis, MIT’s undergraduate economic theory offerings are probably more rigorous than those at any other college or university. MIT’s “Principles of Economics” course, the introductory course, is typically taught at the level of intermediate microeconomic and macroeconomic theory courses at other departments. This enables undergraduates to enroll in follow-up courses in advanced microeconomic and macroeconomic theory. Another popular undergraduate course explores applications of game theory in a wide range of economic settings, including business competition and individual decision-making.

Many former MIT undergraduates who have gone on to graduate study in economics report that their undergraduate theory courses provided a very firm foundation for graduate study.

Graduate students are required to pass four half-semester core courses in microeconomic theory. The first of these courses emphasizes price theory, the theory of consumers and producers that underlies much economic analysis. The second course focuses on game theory, and provides the key equilibrium notions that are needed to analyze interactions between firms in an industry, and between agents in many bargaining environments. The third course concentrates on general equilibrium issues, providing students with a sound background for understanding the forces that determine the nature of market outcomes. Finally, the fourth course focuses on information economics. It touches on questions of contract design, asymmetric information, moral hazard, and the working of insurance markets. Together, these four courses provide a comprehensive introduction to modern microeconomic theory. Most students also enroll in a course on stochastic dynamic programming, which provides some of the theoretical tools that are needed for research in macroeconomics and many applied fields.

Graduate students who plan to specialize in economic theory, and who expect to write dissertations in this field, select a minimum of two advanced courses on game theory, contract theory, and behavioral economics. Other courses cover a variety of more specialized topics such as auction theory, bargaining theory, decision theory, and dynamic optimization. While not all of these courses are required for students to take general exams in economic theory, most students who study economic theory as a major field enroll in virtually all of the advanced theory courses. The set of faculty members teaching the advanced theory courses varies from year to year, and the content of these courses often varies with changes in instructors.

There is a close connection between some issues in economic theory and the modern applied field of financial economics. Much of the modern theory of asset pricing derives from research in economic theory on choice under uncertainty and the allocation of risk in security markets. A substantial body of current research on corporate financial policy begins with insights from contract theory, and from analysis of how firms and households behave in economic environments characterized by asymmetric information. These close ties between theory and financial eco-nomics lead many students who plan to write dissertations in finance to study economic theory as one of their two primary fields of specialization.

Informal discussions take place at weekly theory lunches where graduate students may discuss current topics or present preliminary research ideas. These meetings provide group support for students writing their dissertations in economic theory. Current research developments are presented at weekly MIT-Harvard seminars. These seminars, which host outside speakers, provide excellent opportunities for graduate students to learn what leading scholars are currently working on.