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COURSE OUTLINES
2020-2021

TABLE OF CONTENTS

MPhil in Economics: Compulsory Modules

E100 Microeconomics I
E200 Macroeconomics I
E300 Econometric Methods

MPhil in Economic Research: Compulsory Modules

R100 Microeconomics I
R101 Microeconomics II
R200 Advanced Macroeconomics I
R201 Advanced Macroeconomics II
R300 Advanced Econometric Methods
R301A Econometrics II: Time Series
R301B Econometrics II: Cross Section and Panel Data

MPhil in Finance and Economics: Compulsory Modules

R100 Microeconomics I
E300 Econometric Methods
F100 Finance I
F200 Finance II
F300 Corporate Finance
F400 Asset Pricing

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Optional Modules
S101 Public Economics
S130 Economics of Ageing
S140 Behavioural Economics
S150 Economics of Networks
S170 Industrial Organisation
S201 Applied Macroeconomics
S301 Applied Econometrics
S500 Development
F300 Corporate Finance
F400 Asset Pricing
F500 Empirical Finance (Take home exam)
F520 Behavioural Finance
F530 Venture Capital in the Innovation Economy (Project work)
F540 Topics in Applied Asset Management (Project Work)
F550 Research Methods and Topics in Finance
Paper 1 Development Economics (Module borrowed from Development Studies)

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E100 Microeconomics I

Course Description

This applied microeconomics course is designed specifically for the MPhil in Economics. It adopts the question
motivated approach to teaching microeconomics concepts and applications. The course is centered on three
themes: online markets, politics, and climate change. Within each theme, the relevant microeconomics concepts
and empirical tools are introduced to address core questions about global externalities, climate policy, the design
and regulation of online markets and political decision making processes. The course is deliberately not designed as
a traditional microeconomics course covering consumer and producer theory, markets, general equilibrium,
uncertainty, game theory etc. It is assumed that all students have already covered this material at the intermediate
level (corresponding to Hal Varian, Intermediate Microeconomics or a similar textbook). The philosophy of the
course is to use the three themes as the stating point for a discussion of important economic concepts and to
demonstrate how they can be used in practice to shed some light on important aspects of social reality, how
microeconomic ideas and analysis can inform policy making and how econometric analysis can be used to test
theories and provide evidence for policy-making.

Aims
By the end of the course, we expect students to be able to:
• Apply economic models and reasoning to a wide variety of real-world questions of interest.
• Understand how to identify the strengths and limitations of economic methods as applied to specific issues.
• Understand how economic reasoning enters into policy making, even if it is not the only consideration.
• Be comfortable with using economic ideas both mathematically and in essays.

Overview of the Course

The course is divided into 3 parts. Each part develops a particular theme. The themes are
1. Online and digital markets (Dr Gatti)
2. Economics of Politics (Dr Aidt)
3. Climate change (Dr Rauh)
The objective is, for each theme, to develop the microeconomics tools required and to draw on applications and
empirical evidence to demonstrate how the tools can be used to understand fundamental social issues or resolve
social tensions.

Organization
Each of the three lecturers will be responsible for one theme and give three 2-hours lectures. The teaching
assistant will be responsible for five 2-hour classes. The classes will focus on problem solving and discussions, with
one class devoted to preparation for the take-home project. There will also be a revision class before the written
exam.

Assessment
The course will be assessed on the basis of a take-home project (at the end of Michaelmas) and a 1.5 hours written
exam in May. The project will count 30 % and the written exam will count 70 %. There will be a mid-term written
exam in January. The takehome project will be a 2000 words essay addressing a policy question. The students
are expected to search for relevant literature and evidence themselves, starting from the material covered in the
lectures. The students will be given a choice of three questions from which they will pick one. The written exam will
consist of 3 concise questions related to the entire course which the students will have to answer. There will be no
choice, i.e., the students must answer 3 out of 3 questions.

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Reading requirements
For each session, chapters from relevant textbooks will be assigned as mandatory prelecture readings along with
academic articles and government reports. These are mandatory readings and it is recommended that the students
consult them before the lecture. The reading list will be made available by the lecturer’s prior to their lectures on
Moodle. Lecture slides will be available on Moodle.

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E200 Macroeconomics I

Aims and Objectives

This module aims to provide an overview of macroeconomics, focusing on the theory of economic growth and
business cycles, consumption, investment, unemployment, real and nominal rigidities, monetary and fiscal
policy, and exchange rates. Upon completion of this module, students should have
 a solid understanding of the main phenomena in macroeconomics;
 the ability to analyse macroeconomic issues using theoretical models;
 a sound understanding of the empirical relevance of macroeconomic models.

Course Description
This module provides an overview of some of the main theory and evidence behind key macroeconomic
phenomena, covering the following topics:

• Economic growth: the Solow-Swan model with exogenous technological progress and savings decision. We
analyse the equilibrium of the model and the comparative dynamics around the steady state;

• Consumption: the microfoundation of consumption;

• Business cycles: business cycle stylized facts and setting up simple models to explain them;

• Investment theory;

• Unemployment and rigidities: real rigidities and efficiency wages (Solow condition; Shapiro-Stiglitz model);
hysteresis in unemployment (insider-outsider model); nominal rigidities (menu cost model);

• Macroeconomic policy: dynamic inconsistency in monetary policy, including inflation bias and delegation
solutions (static Barro-Gordon model); monetary policy rules (Taylor rule); very high inflation and seignorage;
fiscal policy (Ricardian equivalence; Barro tax-smoothing model);

• Exchange rates: nominal exchange rates (flexible-price monetary model); exchange rate volatility
(Dornbusch overshooting model); real exchange rates (Harrod-Balassa-Samuelson model);

Organisation
This module consists of two lecture courses with a total of 9 two-hour lectures taught in Michaelmas term
2021 by:
• Dr Rhys Bidder (weeks 1-4), covering economic growth, business cycles, consumption and investment;
• Dr Petra Geraats (weeks 5-9), covering unemployment and rigidities, monetary and fiscal policy, and
exchange rates.

Lecture slides/notes and problem sets will be posted on Moodle. There are 5 problem sets for this module,
which are discussed in 5 classes that are taught by Timo Haber and Charles Parry. One set of answers for the
problem set should be submitted by each group (as assigned by the Faculty) by Monday 9am before each class
and will be marked to provide feedback. You should each answer every question of the problem set before
discussing it in your group and class; this is essential to develop analytical skills and be well-prepared for the
exam.

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Assessment
There is a two-hour mid-course exam for this module in the second week of January.
The final examination for this module is a two-hour written exam in Easter term.
The structure of the exam is published in the Form and Conduct notice on Moodle.

Readings
The main textbook used for this module is:

Romer, David (2019), Advanced Macroeconomics, 5th edition, McGraw-Hill.

More detailed readings will be specified in the lecture notes.

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E300 Econometric Methods

Aims and Objectives

This module aims to provide an overview of basic econometric methods. The focus is on understanding and
interpreting the econometric assumptions and techniques in light of actual empirical applications. Upon completion
of this module, students should have a solid understanding of basic applied econometric methods, be able to
interpret and understand econometric research of others, confidently use econometrics to analyse different kinds
of economic data.

Contents

This module covers the following topics:

Ordinary Least Squares basics using matrix algebra notation
Finite sample and asymptotic inference in linear regression
Heteroskedasticity and Generalized Least Squares
Regression with time series data and serial correlation
Unit roots and cointegration
Maximum Likelihood and models for limited dependent variables
Instrumental Variables
Generalized Method of Moments

Additional applied econometric topics are covered in S301 Applied Econometrics. A four-hour course on STATA
software “STATA for dissertations” is optional but highly recommended.

Organization

The module consists of a lecture course with a total of 27 hours of lectures in Michaelmas term. In addition, there
are 7 classes of 2 hours in Michaelmas term. The main purpose of these classes is to discuss the problem sets to get
essential preparation for the exam.

Assessment

The examination for this module will be by a three-hour written exam.

Readings

Textbooks used for this module are

J.M. Wooldridge (2013), Introductory Econometrics: A Modern Approach, Fifth International Edition, Cengage
Learning
J.H. Stock and M.W. Watson (2011), Introduction to Econometrics, Third Edition, Addison-Wesley
A. Harvey (1990), The Econometric Analysis of Time Series, Second Edition, Pearson Education
W. Greene (2012), Econometric Analysis, Seventh Edition, Pearson Education
B. Hansen (2020), Econometrics, available free of charge from https://www.ssc.wisc.edu/~bhansen/

Additional textbooks will be suggested during the course.

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R100 Microeconomics I

Lecturer: Dr Matt Elliott

Overview: This course will cover the standard economic models of individual decision-making with and without
uncertainty, models of consumer behavior and producer behavior under perfect competition and the Arrow-
Debreu general equilibrium model.

The course will build the foundations for, and then culminate in, a theory of markets and Adam Smith’s “invisible
hand.” We start with people’s underlying preferences and see how when these preferences can be represented in a
more tractable form by utility functions. Historically, two major questions motivated this exercise. First, utilitarian
philosophers were trying to formulate a theory of social choice and government decision making, while economists
were trying to better understand the insights of Adam Smith by formalizing a theory of markets.

Utilizing this theory of choice under certainty we will see how consumption decisions translate into demand and
extend the theory to choice under uncertainty. With these results in hand, we move onto general equilibrium and
how markets can simultaneously clear. This leads us to the welfare theorems, linking efficient outcomes to
markets, and results on the existence of a competitive (Walrasian) equilibrium.

Assignments. There are five problem sets. Cooperation in solving problems on the assignments is encouraged, but
each student is expected to write up his/her own answers.

Prerequisites. The class will be relatively introductory and non-technical. For example, we will state results formally
but stop short of formally proving them, instead giving intuition or sketches of more formal arguments. A basic
knowledge of economics and basic level of mathematical sophistication, particularly with respect to optimization,
will be assumed. Students should be somewhat familiar with multivariable calculus, basic linear algebra and
probability theory.

For those students with a weak mathematical background is weak, some reading and practice doing problems
ahead of the course is advised. A good place to start is the mathematical appendix in Mas-Colell, Wfivehinston,
Green. Similarly, if you've not taken much economics before or want to brush up, you may want to look at an
undergraduate microeconomics text. Among the good options are books by Nicholson, and by Pindyck and
Rubinfeld.

Exams. There will be a midterm exam in January and a final exam in May. The format of the exam in both cases is
such that there are three questions and you have do all of them. The exams will be open book and online. You will
have three hours to complete the exam once you start it. There will be a six hour window during which the exam
must be completed.

Reading. A booklet will be provided that closely follows and supplements the slides from lectures. This is the
primary reading for the course. There are also two excellent and well-known microeconomics textbooks:

Mas-Colell, A., M. Whinston and J. Green, Microeconomic Theory, 1995. Kreps, D., A Course in Microeconomic
Theory, 1990.

The two books have different styles: MWG has the broadest coverage and is fairly concise; Kreps is more chatty.

Additional readings, pertinent to particular topics, will be provided in lectures.

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Tentative Course Plan

1. Choice Theory: Preferences, Choice and Utility Reading: Choice Theory Notes, MWG Ch. 1, Kreps Ch. 2.1.
Topics: Preferences, Choice and Revealed Preference, Utility Representation of Preferences, Properties of
Preferences, Criticisms of Rational Choice Models, Consumer Theory, Producer Theory.

2. Choice under Uncertainty

Reading: Choice under Uncertainty Notes; MWG Ch. 6, Kreps Ch. 3

Topics: Expected Utility Model, Risk aversion, Stochastic Dominance, Applications and Comparative Statics Analysis,
Savage Model, Behavioral Critiques.

3. General Equilibrium
Reading: General Equilibrium Notes; MWG Ch. 15-17, Kreps Ch. 6.

Topics: Concepts and Definitions, Welfare Theorems, Characterizing Equilibrium Allocations, Existence of General
Equilibrium, Uniqueness and Stability of Equilibrium, Comparative Statics, Extensions to the Basic Model,
Limitations of the Welfare Theorems---Externalities and, in particular, Asymmetric Information.

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R101 Microeconomics II
Aims and Objectives:
This course aims to familiarise students with the basic tools of (mainly non-co- operative) game theory and to
enable them to apply game-theoretic-skills to simple economic problems all by themselves. The course will be
concerned with both static and dynamic games.
At every stage, each new abstract theory will be illustrated in the context of some economic example/application.
In order to emphasise the broad potential scope of the theory, these examples/applications will be in one or more
of the following areas: auctions and design of markets, bargaining, finance, information economics and contract
theory, industrial organisation, labour economics, macroeconomics, political economy and public economics. Some
of the examples/applications are covered in the suggested questions for the classes. There may not be enough be
time to cover all applications in the lectures or in the classes.

Tentative Course Plan:

1. Introduction and definitions
2. Static Games of Complete information
3. Static games of incomplete information
4. Mechanism Design with applications to auctions, contracts and public goods
5. Dynamic games with perfect information
6. Bargaining with complete information
7. Repeated Games and ‘collusive behaviour’
8. Dynamic games with imperfect/incomplete information

Assessment: The examination for this module will be by a 3-hour written exam.

Readings:
Some graduate texts on microeconomics also have excellent chapters on game theory and applications. In
particular, I recommend one of the following:
• D. Kreps A Course on Microeconomic Theory (1990) Ch. 11-15
• A.Mas-Colell, M.Whinston and J. Green Microeconomic Theory (1995) Ch. 7, 8, 9, 12, 13, 22, and 23
There are excellent text-books on game theory. Good introductory graduate texts on game theory (these are
appropriate for first year graduate courses but they could also be used for advanced/specialised undergraduates)
are:
• K. Binmore Playing for Real (2008)
• R. Gibbons A Primer in Game theory (1992)
• M. Osborne Introduction to Game Theory (2004)
The following are very good advanced game theory text-books:
• D. Fudenberg and J. Tirole Game Theory (1991)
• M. Maschler, E. Solan, and S. Zamir Game Theory (2013)
• R. Myerson Game Theory; An Analysis of Conflict (1989)
• M. Osborne and A. Rubinstein Game Theory (1994)
The level of the course is somewhere between the two microeconomics texts and the advanced game theory texts.

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R200 Advanced Macroeconomics I

Course Aims and Objectives

This course covers the methodological foundations of modern macroeconomics. The emphasis is put on rigorous
mathematical treatment of macroeoconomic issues, covering concepts such as dynamic optimisation, recursive
representations, and competitive equilibria. These concepts will then be applied to classical models of economic
growth and business cycle fluctuations.

Course Topics

1) General Equilibrium Concepts and Applications (9 hours by T. Cavalcanti)

a) Arrow-Debreu competitive equilibrium

b) Neoclassical growth model

c) Complete markets and risk sharing

d) Sequential competitive equilibrium

2) Dynamic Programming and Recursive Formulations (6 hours by T. Cavalcanti)

a) Bellman equation

b) Contraction mapping and value function iteration

c) Asset pricing

d) Introduction to endogenous growth (time permitting)

3) Busyness cycle fluctuations and DSGE models (12 hours by G. Corsetti)

a) The Real Business Cycle model

b) Log-linearisation and basic solution technique

c) Dynamic New Keynesian models

d) Medium scale DSGE model and analysis

Readings

The main textbook for this course is Miao, J. (2014), Economic Dynamics in Discrete Time, MIT Press. We also offer
additional material in the form of lecture notes exercises, sample exam questions, among others. These will be
available in the course website.

Classes

There will be seven two-hour classes, where problem sets from each module of the course will be solved. There will
be an additional revision class later in the academic year.

Examination

There will be a three-hour written examination

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R201 Advanced Macroeconomics II

Aims and Objectives

This course builds on the methods and concepts introduced in Advanced Macroeconomics (R200) in order to
analyse macroeconomic problems. The course has two main goals. Firstly, to develop students’ skills at formulating
and analysing recursive competitive equilibrium models that feature heterogeneity and frictions. Secondly, to
introduce students to some of the issues that these benchmark models have been used to address.

Topics
We will begin by studying some aspects of the standard growth model and introducing the concept of recursive
competitive equilibrium. We will discuss some of the issues that this model has been used to address, and we will
then consider several benchmark models that extend the standard growth model by introducing heterogeneity
and/or frictions into this framework:
1) Heterogeneity on the production side
• Hopenhayn / Lucas span of control models

2) Heterogeneity on the household side

• Incomplete market models (Huggett / Aiyagari / Bewley)

3) Trading frictions
• McCall searh model
• Lucas-Prescott island models
• Diamond-Mortensen-Pissarides framework

4) Financial frictions
• Williamson

Additionally, we will introduce a limited amount of programming (in Matlab or Python) to solidify some of the
theoretical concepts. Largely this will be a matter of demonstration though students will have the opportunity to
work on some introductory programming tasks.

Readings
The main textbook for this course will be:
-Miao, J. (2014), Economic Dynamics in Discrete Time, MIT Press.
-Ljungqvist, L. and T. J. Sargent (2012), Recursive Macroeconomic Theory, MIT Press
We will supplement this with other textbook readings and general surveys depending on topic. Detailed readings
will be available in the lecture course outlines.

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R300 Advanced Econometric Methods

Aims and Objectives
This module serves as an introduction to fundamental econometric techniques at the graduate level. The goal is to
prepare students for working on their Ph.D. Upon completion of the module students should be able to (i) interpret
and understand econometric research of others and (ii) confidently use econometrics to analyse their own data.

Prerequisites
Students are expected to be familiar with elementary concepts of probability and statistics at the level of
Casella, G.C. and R.L. Berger, Statistical Inference, Cengage Learning, 2008.
The course also makes use of matrix algebra, calculus (integration and differentiation), and optimization.

Topics
This module consists of 27 hours of lectures, supplemented with 14 hours of classes. The chief aim of the classes is
to go over the problem sets.
This module covers the following topics:
1. Estimation in parametric models
1.1. Problem statement and efficiency bound
1.2. Asymptotics
1.3. Maximum likelihood
1.4. Extended example: The classical linear regression model
2. Testing in parametric models
2.1. Likelihood ratio test
2.2. Size and power
2.3. Other test procedures: Score test, Chi-square test and Wald test
2.4. Extended example: The classical linear regression model
3. Estimation and testing in semiparametric models
3.1. Moment conditions
3.2. (Generalized) method of moments
3.3. Optimal weighting and semiparametric efficiency
3.4. Extended example: Instrumental variable estimation
3.5. Optimality with conditional moment conditions
4. Introducing (weak) dependence
5. Nonparametric regression
5.1. Kernel estimator
5.2. Local polynomial estimator
5.3. Illustration to problems in program evaluation
The short course Stata for dissertations is available for students and, although optional, is highly recommended.

Assessment
The examination for this module consists of a three-hour written exam.

Readings
Lecture slides and notes will be made available through Moodle.
No single textbook is followed. The topics dealt with are discussed in the following textbooks:
a. Arellano, M., Panel Data Econometrics, Oxford University Press
b. Davidson, R. and J.G. MacKinnon, Estimation and Inference in Econometrics
c. Hayashi, F., Econometrics, Princeton University Press
d. Wooldridge, J., Econometric Analysis of Cross Section and Panel Data, MIT Press

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R301A Econometrics II: Time Series

Instructor: Professor Oliver B. Linton: Room 25; obl20@cam.ac.uk

Assistant: Dr. Weiguang Liu; wl342©cam.ac.uk

My Office Hours: Wednesdays 4-5pm

Time and Location: 18 hours of lectures in Lent Term

Assessment: Two hour final exam subject to covid19 (replaced by take home exam)

Course Description: This course is an introduction to some major topics in time series. The application areas
are to macroeconomics, finance, climate change and covid modelling. There will be an emphasis on models and
methods as well as on empirical results and their interpretation. The course will be intermediated through
Moodle, where extra problems, and their solutions will be disseminated. There will be three problem sets, some
questions of which will require the use of a software package such as Eviewn, Matlab, or R. Solutions will be
provided. The teaching assistant will provide support for problem sets, programming, and exam review.

References

[1] Time Series: Theory and Methods (2006). Brockwell, P.J., and R.A. Davies. 2nd edition, Springer
[2] Introduction to Statistical Time Series (1996). Fuller, W. 2nd edition, John Wiley
[3] Structural Vector Autoregressive Analysis (2017). Kilian, L. and H. Lutkepohl Cambridge University Press
[4] Financial Econometrics (2019). Linton, O. Cambridge University Press.
[5] Handbook of Econometrics, Elsevier, Volume 4, 1994, ISSN 1573-4412, ISBN 9780444887665, Eds.
R.F. Engle and D. McFadden

(a) James D. Hamilton, Chapter 50 State-space models, Pages 3039-3080,

(b) Tim Bollerslev, Robert F. Engle, Daniel B. Nelson, Chapter 49 Arch models, Pages 2959-3038

(c) Timo Terasvirta, Dag Tj0stheim, Clive W.J. Granger, Chapter 48 Aspects of modelling nonlinear time series,

(d) Mark W. Watson, Chapter 47 Vector autoregressions and cointegration,

(e) James H. Stock, Chapter 46 Unit roots, structural breaks and trends,

(f) Jeffrey M. Wooldridge, Chapter 45 Estimation and inference for dependent processes,

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Outline
There are nine lectures of two hours each. The topics covered may include:

1. Introduction and Linear time series models.

(a) Time Series Models

(b) ARMA Models
(c) Stationarity and invertibility
(d) Dependence and Mixing
(e) Autocovariance

(f) Wold decomposition

(g) Estimation
(h) Model Selection
(i) Forecasting

2. Spectral Analysis of Time Series

(a) Power Spectrum

(b) Properties
(c) Periodogram
(d) Estimation
(e) Band pass regression

3. Inference under Weak Dependence

(a) GMM estimator

(b) Parzen-Newey-West standard errors

(c) Alternative methods such as self normalization

(d) Empirical results

4. Unit roots and trend modelling

(a) Deterministic trend and seasonal

(b) Unit root process

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(c) Testing for unit roots

5. Vector Autoregressions

(a) Stationarity and invertibility

(b) Granger and Sims causality
(c) Estimation
(d) Impulse response
(e) Structural VAR and identification
(f) Cointegration
(g) Empirical results

6. Kalman Filter

(a) State Space model

(b) The Filter
(c) Applications

7. Bayesian Methods and MCMC

(a) Bayesian Inference

(b) Simulation methods
(c) VAR application

8. Nonlinear models

(a) Threshold Autoregression

(b) GARCH Models
(c) Estimation, Testing and forecasting

9. Forecast Evaluation

(a) Mincer-Zarnowitz
(b) Diebold Mariano
(c) Giacomini and White
(d) Modern approaches

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R301B Econometrics II: Cross Section and Panel Data

lecturer: Dr. M. J. Weeks

This course consists of 18 hours of lectures dealing with estimation and inference using both cross-section and
panel data.

Topics covered will be taken from: Generalised Method of Moments, random utility models in discrete choice,
heterogeneity and endogeneity in binary choice models, program evaluation and treatment effects, fi and random
effects estimators for panel data, nonlinear and dynamic panel data models, count data models, Bayesian methods
for latent variables, and machine learning for predictive and causal inference.

We may consider the material in three Parts

PART I - Nonlinear Models for Discrete Data

PART II - Linear Panel Data Models

PART III - Topics in Bayesian Microeconometrics

PART IV - Machine Learning and Nonparametric Estimators

Textbooks

Wooldridge, J. (2010). Econometric Analysis of Cross-Section and Panel Data. MIT.

A. C. Cameron and P. K. Trivedi (2005) Microeconometrics: Methods and Applications, Cambridge University Press

J. Freidman, T. Hastie, R. Tibshirani (2009). The Elements of Statistical Learning. Springer, publishers.

We will examine a selection of the following topics.

Topic 1: Discrete Choice I: Binary Response Models

CT: Chapter 15. Section 15.1-15.8

(a) Revealed and Stated Preference Models

(b) Partial Effects and Average Partial Effects

(c) Unobserved Heterogeneity in Binary Response

Applications

Do Workplace Smoking Bans Reduce Smoking?

Children and Their Parents’ Labor Supply

Topic 2: Alternative Estimators for Nonlinear Models with Endogeneity

CT: Chapter 15. Section 15.1-15.8

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(a) Alternative Estimators for Binary Response Models

(b) Binary Response with Endogenous Continuous Variates

(c) Binary Response with Endogenous Discrete Variates

Topic 3: Discrete Choice II: Multinomial Response Models

CT: Chapter 15. Section 15.1-15.8

(a) Theoretical Underpinnings of Discrete Choice Models

(b) The Specification of a Random Utility Model

(c) The Multinomial Probit Model

(d) Identification

(e) The Logit Model

(f) Independence of Irrelevant Alternatives

(g) Endogeneity and Discrete Choice

Applications

Models of Labour Supply Models of Travel Demand Models of Electricity Supplier

Topic 4: Discrete Choice III - The Mixed Logit Model

CT: Chapter 15

(a) The Mixed Logit Model

(b) Error and Random Coefficient Models

(c) Towards Flexible Substitution Patterns

Application

The Demand for Cars and CO2 Emissions

Topic 5: Panel Data I - Linear Unobserved Effects Panel Data Models

CT: Chapter 21; Wooldridge: Chapter

(a) Introduction to Panel Data Models

(b) Weak and Strict Exogeneity

(c) The Fixed Effects Estimator

(d) The Random Effects Estimator

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(e) The Correlated Random Effects Estimator (f) Hausman Tests

Applications

Life Cycle Labour Supply

Price Cap Regulation in the Water Industry: An Application of Panel Data Stochastic Frontier Models

Topic 6: Panel Data II - Panel Data Discrete Choice Models

(a) Unobserved Heterogeneity in Binary Response Models

(b) Fixed Effects Logit and Random Effects Probit

(c) Dynamic Panel Binary Response Models

Application

Labour Supply and Fertility

Topic 7: Panel Data III - Large T Panels

(a) The N and T Dimensions

(b) Random Coefficient Models

(c) Dynamic Panels: small T

(d) Dynamic Heterogenous Panels: large T

(e) Pooled Mean Group Estimators

Topic 8.i: Bayes, Inverse Probability and Conjugate Priors

(a) Bayesian Inference and Heart Attacks

(b) From Inverse Probability to Bayesian Inference

(c) Bayesian Methods with Conjugate Priors

(d) Posterior Assessment for a Proportion

Topic 8ii: Fundamentals of Bayesian Inference

(a) Bayes Theorem for Events and parameters

(b) De Finetti’s Representation Theorem

(c) Parameter Uncertainty

(d) Model Uncertainty (f) Multiplicity

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(g) Hierarchical Models for Combining Data

(h) Model Selection and Model Averaging

Topic 8.iii: The EM Algorithm and Data Augmentation for Latent Variable Models

(a) The EM Algorithm

(b) Data Augmentation for Missing Data Models

(c) Bayesian Inference for Binary Choice

(d) Bayesian Inference for the Mixed Logit Model

(e) Semiparametric Estimators and the EM Algorithm

Topic 9: Programme Evaluation and Treatment Effects

(a) Overview

(b) Types of Treatment Effects

(c) Ignorability of Treatment

(d) Endogenous Selection

(e) Matching Estimators

(f) The Difference-in-Difference Estimator

Readings - Cameron and Trivedi (2005) Chapter 25.8.5 pages 893-6

Application

Evaluating treatment effect of training on Earnings using Propensity Scores

Topic 10: Machine Learning and Decision Trees

(a) What is Machine Learning

(b) Econometrics versus Machine Learning

(c) Conditional Expectation and Regression Tress

(d) Nonparametric Precursors :Histograms, Nearest Neighbours and Kernel Regression

Topic 10b: Machine Learning and Regression Trees and Forests

(a) An Overview of Regression Trees

(b) The Bias-Variance Tradeoff

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(c) Training, Testing and Cross Validation

(d) Adaptive Nearest Neighbours and Regression Trees

(e) Regularization: Variance reduction and Ensemble Learning (f) Variable Importance

(g) Application: House Prices

Topic 10c: Machine Learning for Causal Effects

(a) Models for Treatment Effects

(b) Causal Trees

(c) Honest Estimation

(d) Forests and Variance Reduction Methods

(e) Testing for Heterogeneity in Treatment Effects

(f) Application: Time of Use Tariffs and Smart Meter Data

Topic 11: Count Data Models

CT: Chapter 20

(a) Count Modelling: Fully Parametric versus Mean-Variance

(b) mle versus Quasi mle

(c) Overdispersion in Count Data

(d) Mixture Models: A Negative Binomial Extension

(e) gmm for Conditional Mean

Application

The Number of Children Ever Born To a Woman

Other Topics

Topic: Generalised Method of Moments I: Introduction

CT: Chapter 6

(a) Introduction

(b) Optimal Weight Matrices: Some Intuition

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Topic: Generalised Method of Moments II: The Linear Model

CT: Chapter 6

(a) The Method of Moments

(b) ols and iv Moment Estimators

Topic: Generalised Method of Moments III: Testing

CT: Chapter 6

(a) Introduction

(b) Overidentification Tests: The Validity of Moment Restrictions

(c) Identification Tests: The Relevance of Moments

(d) Weak Identification

(e) iv/2sls or ols

Application

Isolating the effect of Education on wages from Ability

Topic: Dynamic Panel Data Models

CT: Chapter 22

(a) Weak versus Strict Exogeneity

(b) lsdv Bias in Dynamic Models

(c) The Difference gmm Estimator

(d) The System gmm Estimator

(e) Pooled Mean Group Estimators

Applications

Labor Demand in US Manufacturing, 1991-1996

Topic: Willingness To Pay

(a) Stated and Revealed Preferences (Eliciting Preferences)

(b) Willingness To Pay in Choice Models

(c) Willingness To Pay in Regulated Markets

(d) Models In Preference and wtp Space

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Readings - CT: Chapter 15. Section 15.4-15.5

Application

Willingness-to-Pay for Electric Vehicles and Natural Areas

Software

We will make use of stata since it includes a large number of relatively advanced modules that are relevant to this
course, such as mixed logit and gmm.

We will also use r and Python where appropriate.

Principal Texts

Wooldridge, J. (2012) Introductory Econometrics: A Modern Approach, 5th edition. International Student Edition.

A. C. Cameron and P. K. Trivedi (2005) Microeconometrics: Methods and Applications. Cambridge University Press

Wooldridge, J. (2010). Econometric Analysis of Cross-Section and Panel Data. MIT.

Econometrics of Discrete Choice

[*] CHAPTER 15, Multinomial Models in Cameron, C.A. and P.K. Trivedi (2005) Microeconometrics: Methods and
Applications. Cambridge Uni- versity Press.

[**] Kenneth, E. Train (2003), Discrete Choice Methods with Simulation, Cambridge University Press, Cambridge,
UK.

[1] Chesher, A. and J. Santos-Silva (2002) “Taste variation in discrete choice models”, Review of Economic Studies
69, 62-78.

[2] Daganzo, C. (1979), Multinomial Probit: The Theory and its Application to Demand Forecasting, Academic Press,
New York.

https://ezp.lib.cam.ac.uk/login?url=https://doi.org/10. 1016/C2009-0-22050-2

[3] Hensher, D. and W. Greene (2001), “The mixed logit model: The state of practice and warnings for the unwary”,
Working Paper, School of Business, The University of Sydney.

[4] Hensher, D. and W. Greene (2003), “The mixed logit model: the state of practice”. Transportation, 30(2), 133-
176.

[5] McFadden, D. (2001), “Economic choices”, American Economic Review

91, 351-378.

[6] McFadden, D. and K. Train (2000), “Mixed MNL models of discrete response”, Journal of Applied Econometrics
15, 447-470.

[7] McFadden, D., K. Train and W. Tye (1978), “An application of diagnostic tests for the independence from
irrelevant alternatives property of the multinomial logit model”, Transportation Research Record 637, 39-46.

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https://www.vle.cam.ac.uk/pluginfile.php/8013722/mod_page/ content/80/Counter%20M320_3.pdf

[8] Revelt, D. and K. Train (1998), “Mixed logit with repeated choices”,

Review of Economics and Statistics 80, 647-657.

[9] Train, K. (1999), “Mixed logit models for recreation demand”, in J. Herriges and C. Kling, eds., Valuing Recreation
and the Environment, Edward Elgar, Northampton, MA.

Towards Flexible Substitutions Patterns

[1] Anderson, S. A. de Palma, and F. Thisse (1989). “Demand for Differentiated Products Choice Models and the
Characteristics Approach”, Review of Economic Studies, 56, 2.

[2] Berry, S. (1994). “Estimating Discrete Choice Models of Product Differentiation”, RAND Journal of Economics,
25, 242-262.

[3] Berry, S. J. Levinsohn, and A. Pakes (1995). “Automobile Prices in Market Equilibrium”. Econometrica Vol. 63,
No. 4 (July) 841-890.

[4] Berry, S. T., and Haile, P. A. (2010), “Identification in differentiated products markets using market level data”
(no. w15641). National Bureau of Economic Research.

[5] Brownstone, D. and K. Train (1999), “Forecasting new product penetration with flexible substitution patterns”,
Journal of Econometrics 89, 109-129.

[6] McFadden, D. and K. Train (1996), “Consumers’ evaluation of new products: Learning from self and others”,
Journal of Political Economy 104, 683-703.

[7] Petrin, A. (2002). “Quantifying the Benefits of New Products: The Case of the Minivan”. Journal of Political
Economy, vol. 110, no. 4. pp. 705- 729.

[8] Goldberg, P.K. (1995). ”Product Differentiation and Oligopoly in Inter- national Markets: the Case of the US
Automobile Industry”. Econometrica 63 (July), pp. 891-951.

[9] Nevo, A. (2000) ”Mergers with differentiated products: the case of the ready-to-eat cereal industry”. Rand
Journal of Economics, Vol. 31, pp. 395-421.

[10] Nevo, A. (2001) ”Measuring Market Power in the Ready-to-Eat Cereal Industry”. Econometrica 69(2), pp. 307-
342.

[11] Reiss, P. and Wolak, F. (2004) ”Structural Econometric Modeling: Rationales and Examples from IO”. Handbook
of Econometrics, Vol. 5

https://www.sciencedirect.com/science/article/pii/
S1573441207060643/pdfft?md5=60eaeb2e3f9c26323d5c76031a3dc4a5& pid=1-s2.0-S1573441207060643-
main.pdf

[12] Pakes, A. (2003) ”Common Sense and Simplicity in Empirical Industrial Organization” Working Paper 10154,
NBER, Cambridge, Mass. USA

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IV and Generalised Method of Moments

[*] CHAPTER 6. Generalised Method of Moments and Systems Estimation in Cameron, C.A. and P.K. Trivedi (2005)
Microeconometrics: Methods and Applications. Cambridge University Press.

[1] Angrist, J. “Lifetime Earnings and the Vietnam Era Draft Lottery: Evidence from Social Security Administrative
Records”, American Eco- nomic Review, June 1990.

[2] Angrist, J. “Using Social Security Data on Military Applicants to Estimate the Effect of Military Service on
Earnings”, Econometrica, March 1998.

[3] Newey, W. “Generalised Method of Moments Specification Testing”,

Journal of Econometrics 29, 1985, 229-256.

[4] Newey, W. and K. West, “Hypothesis Testing with Efficient Method of Moments Estimation”, International
Economic Review 28, October 1987, 777-787.

[5] Wooldridge, Jeffrey. M. 2001. ”Applications of Generalized Method of Moments Estimation.” Journal of
Economic Perspectives, 15(4): 87– 100.

Weak Instruments

[1] Bound, J. Jaeger, D. and Baker, R. “Problems with Instrumental Variables Estimation when the Correlation
Between the Instruments and the Endogeneous Regressors is Weak”, JASA, June 1995.

[2] Murray, M.P. (2006) “Avoiding Invalid Instruments and Coping with Weak Instruments”. The Journal of
Economic Perspectives, Vol. 20, No. 4 (Fall, 2006), pp. 111-132

[3] Newey, W. K. and Windmeijer, F. (2009). Generalized method of moments with many weak moment conditions.
Econometrica, 77(3), 687- 719.

[4] Stock, J.H. and Yogo, M. (2005). Testing for Weak Instruments in Lin- ear IV Regression. Chapter 5 in J.H. Stock
and D.W.K. Andrews (eds) Identification and Inference for Econometric Models: Essays in Honor of Thomas J.
Rothenberg, Cambridge University Press. Originally published 2001 as NBER Technical Working Paper No. 284;
newer version 2004.

[5] Stock, J.H., Wright, J.H. and Yogo, M. (2002). A Survey of Weak Instruments and Weak Identification in
Generalised Method of Moments, Journal of Business and Economic Statistics, 20, 518-529.

Static Panel Data Models

[1] Chamberlain, G. (1984). Panel Data, Handbook of Econometrics, Volume 2, ed. Z. Griliches and M. D. Intriligator.
North Holland, 1248-1318.

https://www.sciencedirect.com/science/article/pii/
S1573441284020146/pdf?md5=8f99b4ad483910666be5238829855356& pid=1-s2.0-S1573441284020146-
main.pdf

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[2] Mundlak, Y. (1978). On the Pooling of Time series and Cross Section Data, Econometrica, 46, 69-85.

[3] Hansen, C.B. (2007b), Generalized Least Squares Inference in Panel and Multilevel models with Serial
Correlation and Fixed Effects, Journal of Econometrics.

[4] Moulton, Brent R. (1990). An Illustration of a Pitfall in Estimating the Effects of Aggregate Variables in Micro
Units, Review of Economics and Statistics, LXXII.

[5] Wooldridge, Jeffrey M. (2003). Cluster-Sample Methods in Applied Econometrics, American Economic Review,
XCIII.

Dynamic Panel Data Models

[*] CHAPTER 21 [22.5]. Linear Panel Data Models: Extensions, C.A. and P.K. Trivedi (2005) Microeconometrics:
Methods and Applications. Cambridge University Press.

[1] Arellano, M. and Bond, S.R. (1991), Some tests of specification for panel data: Monte Carlo evidence and an
application to employment equations, Review of Economic Studies, 58, 277-297.

[2] Arellano, M. and Bover, O. (1995), Another look at the instrumental variable estimation of error-components
models, Journal of Econometrics, 68, 29-52.

[3] Blundell, R.W. and Bond, S.R. (1998), Initial conditions and moment restrictions in dynamic panel data models,
Journal of Econometrics, 87, 115-143

[4] Bundell, R.W. and Bond, S.R. (2000), GMM estimation with persistent panel data: an application to production
functions, Econometric Reviews, 19, 321-340.

[5] Bond, S.R., Hoeffler, A. and Temple, J. (2001), GMM estimation of empirical growth models, CEPR Discussion
Paper no. 3048 (http://www.cepr.org/pubs/new-dps/dplist.asp?dpno=3048)

[6] Arellano, M. (2003), Panel Data Econometrics, Oxford University Press

[7] Wooldridge, J.M. (2001), Econometric Analysis of Cross Section and Panel Data, MIT

[8] Roodman, J.M. (2006), How To Do Xtabond2, Working Paper Center for Global Development, No. 103

[9] Judson, R. A. and A. L. Owen (1999), Estimating Dynamic Panel Data Models: A Guide for Macroeconomists,
Economic Letter, vol. 65, pp. 9-15.

[10] S. Bond (2002), Dynamic Panel Data Models: A Guide to Micro Data Methods and Practice, Cemmap Workin
Paper CWP09/02, Institiute for Fiscal Studies.

Programme Evaluation and Treatment Effects

[1] Heckman, J. and Hotz, V. (1989). Choosing among Alternatives Non- experimental Methods for Estimating the
Impact of Social Programs, Journal of the American Statistical Association, 84, 862-874.

[2] Heckman, J., Ichimura, H. and Todd, P. (1997). Matching as an Econometric Evaluation Estimator: Evidence from
Evaluating a Job Training Programme, The Review of Economic Studies, 64(4), 605-654.

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[3] Heckman, J. Ichimura, H. and Todd, P. (1998). Matching as an Econometric Evaluation Estimator, The Review of
Economic Studies 65(2), 261-294.

[4] Imbens, G. and Lemieux, T. (2007). Regression discontinuity designs: A guide to practice. Journal of
Econometrics.

[5] LaLonde, R. (1986). Evaluating the Econometric Evaluations of Training Programs with Experimental Data,
American Economic Review, 76, 604-620.

[6] Angrist, J.D. and J.-S. Pischke, (2009), Mostly Harmless Econometrics: An Empiricist’s Companion. Princeton
University Press.

[7] Joshua D. Angrist (2001) Estimation of Limited Dependent Variable Models with Dummy Endogenous
Regressors: Simple Strategies for Empirical Practice. Journal of Business & Economic Statistics, Vol. 19, No. 1.

[8] Joshua D. Angrist (2004) Treatment Effect Heterogeneity in Theory and Practice. The Economic Journal, Vol. 114.

[9] Angrist, J. D. and A. Krueger (1999) Empirical Strategies in Labour Economics. in Handbook of Labour Economics,
vol. 3A.

[10] Heckman, J. J. Tobias and E. Vytlacil (2001) Four Parameters of Interest in the Evaluation of Social Programs.
Southern Economic Journal, vol. 68, pp210-223.

[11] Heckman, J. (2007) Schools, Skills and Synapses. Lecture at Peking University, China.
http://jenni.uchicago,edu/papers/pku_2007/.

[12] Blundell, R.W., and M. Costa Dias, (2002), “Alternative Approaches to Evaluation in Empirical
Microeconomics.” Portuguese Economic Journal, 1, 91-115. http://cemmap.ifs.org.uk/wps/cwp0210.pdf

[13] Bertrand, M. Duflo, E. and Mullainathan, S. (2004). How Much Should We Trust Differences-in-Differences
Estimates?. Quarterly Journal of Economics 119 (1).

[14] Card, D., and A.B. Krueger, (1994). Minimum Wages and Employment: A Case Study of the FastFood Industry in
New Jersey and Pennsylvania. American Economic Review 84.

Binary Choice and Endogeneity

[1] Dong, Y. and Lewbel, A. (2012). ‘Simple Estimators for Binary Choice Models with Endogenous Regressors’.
Research Paper. University of California Irvine and Boston College.

[2] Lewbel, A., Dong, Y. and Yang, T. T. (2012). Comparing features of convenient estimators for binary choice
models with endogenous regressors. Canadian Journal of Economics/Revue Canadienne d’economique, 45(3), 809-
829.

[3] Blundell, Richard, Dennis Kristensen, and Rosa L. Matzkin 2013. ”Con- trol Functions and Simultaneous
Equations Methods”, American Eco- nomic Review, 103(3), 563-569.

[4] Chesher, Andrew and Adam M. Rosen. 2013. ”What do instrumental variable models deliver with discrete
dependent variables?” American Economic Review, 103(3), 557-562.

[5] Altonji, Joseph G., Todd E. Elder and Christopher R. Taber (2005). Selection on Observed and Unobserved
Variables: Assessing the Effecttiveness of Catholic Schools. Journal of Political Economy 113(1).

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[6] Altonji, Joseph G., Todd, E. Elder and Christopher R. Taber (2002). An Evaluation of Instrumental Variable
Strategies for Estimating the Effects of Catholic Schools. Working Paper no. 9358 (NBER), Cambridge, MA.

[7] Evans, William N. and Robert M. Schwab (1995). Finishing High School and Starting College: Do Catholic Schools
Make a Diference?. Q.J.E. 110 (November): 941-74.

[8] Altonji, J. G., Elder, T. E. and Taber, C. R. (2005). Selection on observed and unobserved variables. Assessing
the effectiveness of catholic schools. The Journal of Political Economy, 113(1), 151-184. doi:10.1086/426036.

Dynamic Binary Choice

[1] Bernard, A.B. and J. B. Jensen (2004). ‘Why Some Firms Export’. The Review of Economics and Statistics, 86(2),
561-569.

[2] Carrasco, R. (2001). ‘Binary Choice with Binary Endogenous Regressors in Panel Data: Estimating the Effect of
Fertility on Female Labor Participation’. Journal of Business and Economic Statistics, 19(4). American Statistical
Association.

[3] Chay, K. and D. Hyslop (1998). Identification and Estimation of Dynamic Binary Response Panel Data Models:
Empirical Evidence using Alternative Approaches. mimeo, Dept. of Economics, UCLA.

[4] Drakos, K., and Konstantinou, P. T. (2013). Investment decisions in manufacturing: assessing the effects of real
oil prices and their uncertainty. Journal of Applied Econometrics, 28(1), 151-165.

[5] Dong, Y. and Lewbel, A. (2012). ‘Simple Estimators for Binary Choice Models with Endogenous Regressors’.
Research Paper. University of California Irvine and Boston College.

[6] Lewbel, A., Dong, Y. and Yang, T. T. (2012). Comparing features of convenient estimators for binary choice
models with endogenous regressors. Canadian Journal of Economics/Revue Canadienne d’economique, 45(3), 809-
829.

[7] Rabe-Hesketh, S. and Skrondal, A. (2013). Avoiding biased versions of Wooldridge’s simple solution to the initial
conditions problem. Eco- nomics Letters, 120(2), 346-349.

[8] Skrondal, A. and Rabe-Hesketh, S. (2013). Handling initial conditions and endogenous covariates in
dynamic/transition models for binary data with unobserved heterogeneity. Journal of the Royal Statistical Society:
Series C (Applied Statistics).

[9] Stewart, M. (2006). ‘Maximum simulated likelihood estimation of random-effects dynamic probit models with
autocorrelated errors’. The Stata Journal 6(2) 256-272.

[10] Wooldridge, J.M. (2002). ‘Simple Solutions to the Initial Conditions Problem in Dynamic, Nonlinear Panel Data
Models with Unobserved Heterogeneity’. Cenmap Working Paper CWP18/02. The Institute for Fiscal Studies,
Department of Economics, UCL.

Count Data

[*] CHAPTER 20, Models of Count Data in Cameron, C.A. and P.K. Trivedi (2005) Microeconometrics: Methods and
Applications. Cambridge University Press.

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[1] Blundell, R., Griffith, R. and Windmeijer, F. (2002), Individual effects and dynamics in count data models. Journal
of Econometrics, 108(1), 113-131.

[2] Cameron, A.C. and P.K. Trivedi (1986), “Econometric Models Based on Count Data: Comparisons and
Applications of Some Estimators”, Journal of Applied Econometrics, 1, 29-53.

[3] Cameron, A.C. and P.K. Trivedi (1998), Regression Analysis for Count Data, Econometric Society Monograph No.
30, Cambridge UK, Cam- bridge University Press.

[4] Gourieroux, C., A. Monfort, and A. Trignon (1984), “Pseudo-Maximum Likelihood Methods: Applications to
Poisson Models,” Econometrica, 52, 701-720.

Basics of Bayesian Inference

[1] Akaike H. (1973). Information Theory and an Extension of the Maximum Likelihood Principle. In Second
International Symposium on Information Theory, Petrov B, Csake F. (eds). Akademiai Kiado: Budapest.

[2] Geweke J. (1993). “Bayesian Treatment of the Independent Student-t Linear Model. Journal of Applied
Econometrics 8: S19-S40.

[3] Kass R., Raftery A. (1995). Bayes Factors. Journal of the American Sta- tistical Association 90(430): 773-95.

[4] Leamer E.E. (1973). Multicollinearity: A Bayesian Interpretation. Review of Economics and Statistics 55(3): 371-
80.

[5] Smith, A., & A. Gelfand (1992). Bayesian Statistics without Tears: A Sampling–Resampling Perspective. The
American Statistician, vol. 46, Is- sue 2.

Bayesian Discrete Choice Models

[*] CHAPTER 13, Bayesian Methods in Cameron, C.A. and P.K. Trivedi (2005) Microeconometrics: Methods and
Applications. Cambridge University Press.

[1] Albert, J. and S. Chib (1993), “Bayesian analysis of binary and poly- chotomous response data”, Journal of the
American Statistical Association 88, 669-679.

[2] Allenby, G.M. and P.E. Rossi (1999) “Marketing Models of Consumer Heterogeneity” Journal of Econometrics 89,
57-78.

[3] Chib, S. and E. Greenberg (1998), “Analysis of multivariate probit models”, Biometrika 85, 347-361.

[4] Contoyannis, P., Jones, A. M. and Rice, N. (2004). Simulation-based inference in dynamic panel probit models:
an application to health. Empirical Economics, 29(1), 49-77.

[5] Imai, S. Jain, N. and Ching, A. (2009). Bayesian estimation of dynamic discrete choice models, Econometrica,
77(6), 1865-1899.

[6] McCulloch, R. and P. Rossi (2000), “An exact likelihood analysis of the multinomial probit model”, Journal of
Econometrics 64, 207-240.

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[7] McCulloch, R. and P. Rossi (2000), “Bayesian analysis of the multi- nomial probit model” in R. Mariano, T.
Schuermann and M. Weeks (eds). Simulation-Based Inference in Econometrics, Cambridge Univer- sity Press, New
York.

[8] Poirier, D.J. (1996) “A Bayesian Analysis of Nested Logit Models” Jour- nal of Econometrics 75, 163-181.

[9] Soyer, R. and Sung, M. (2013). Bayesian dynamic probit models for the analysis of longitudinal data.
Computational Statistics and Data Analysis, 68, 388-398.

Markov Chain Monte Carlo

[1] Albert, J., and S. Chib (1993) Bayesian Analysis of Binary and Polychoto- mous Response Data, Journal of the
American Statistical Association, Vol. 88, No. 422 pp. 669-679.

[2] Casella, G., George, E.I. (1992). Explaining the Gibbs Sampler. The American Statistician, 46, 167– 174.

[3] Gelfand, A. E., and F. M. Adrian Smith (1990) Sampling-Based Approaches to Calculating Marginal Densities,
Journal of the American Statistical Association, Vol. 85, No. 410. , pp. 398-409.

[4] Wei, G., and M. Tanner (1990) A Monte Carlo Implementation of the EM Algorithm and the Poor Man’s Data
Augmentation Algorithm, Journal of the American Statistical Association Vol. 85, No. 411 (Sep., 1990), pp. 699-704.

[5] Chib, S. (1995) Understanding the Metropolis-Hastings Algorithm and the Poor Man’s Data Augmentation
Algorithm, The American Statistician Vol. 49, No. 411 (Nov., 1995).

[6] Metropolis, N. & S. Ulam (1949). The Monte-Carlo method. Journal of the American Statistical Association
44:335-341.

[7] Metropolis, N., A.W. Rosenbluth, M.N. Rosenbluth, A.H. Teller & E. Teller (1953). Equation of state calculations
by fast computing machines. Journal of Chemical Physics 21: 1087-1092.

[8] https://en.wikipedia.org/wiki/Metropolis\OT1\ textendashHastings_algorithm

[9] Tanner, M., and W. Wong (2010) From EM to Data Augmentation: The Emergence of MCMC Bayesian
Computation in the 1980s. Statistical Science Vol. 25, No. 4, 506–516.

Machine Learning

[1] L. Breiman, J. Freidman, R. Olshen, C. Stone. Classification and Regression Trees. Klein-Verlag, 1990.

[2] J. Freidman, T. Hastie, R. Tibshirani. The Elements of Statistical Learning. Springer, 2009.

[3] G. James, D. Witten, T. Hastie, R. Tibshirani. An Introduction to Statistical Learning with Applications in R.
Springer, 2013.

[4] S. Athey, G. Imbens. Recursive partitioning for heterogeneous causal effects Proceedings of the National
Academy of Sciences, 113(27):7353– 7360, 2016.

[5] L. Breiman Statistical Modeling: The Two Cultures Statistical Science,

Vol. 16, No. 3. pp. 199-215

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[6] E. O’Neill, M. Weeks. Causal Tree Estimation of Heterogeneous Household Response to Time-Of-Use Electricity
Pricing Schemes arXiv:1810.09179v1, 2018.

[7] S. Athey The Impact of Machine Learning on Economics. in, The Economics of Artificial Intelligence: An Agenda,
2018. National Bureau of Economic Research. See http://bit.ly/2EENtvy

[8] S. Athey,G. Imbens Machine Learning Methods Economists Should Know About. Working Paper, 2019, Graduate
School of Business, Stan- ford University.

[9] S. Athey, S. Wager. Estimation and inference of heterogeneous treatment effects using random forests. Journal
of the American Statistical Association, 2017.

[10] Athey, S., Tibshirani, J. and Wager, S. (2018). Generalized random forests. Annals of Statistics.

[11] Y. Lin, J. Yongho Random forests and adaptive nearest neighbors Journal of the American Statistical Association
Vol. 101, No. 474 (2006), pp.578-590

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F100 Finance I & F200 Finance II

Aims and Objectives
The objective of this course is to provide a solid grounding in the principles and practice of financial markets
and develop the understanding of the tools necessary to make good financial decisions. The course will cover
modern capital markets theory and its applications to corporate finance.

CONTENTS:

1) Financial Markets and Management

a. Financial Markets
b. Opportunity Cost of Capital
c. Role of Financial Markets
d. Role of Management
e. Arbitrage Pricing

2) Present Value
a. Valuing Cash Flows
i. The Time Value of Money
ii. Future Value
iii. Present Value
iv. Value Additivity
b. Project Evaluation
i. Net Present Value
ii. The Net Present Value Rule
c. Shortcuts to Special Cash Flows
i. Perpetuities - Growing Perpetuities
ii. Annuities - Growing Annuities
d. Compound Interest Rates
i. Compound Interest versus Simple Interest
ii. Discrete Compounding
iii. Continuous Compounding
iv. Effective Annual Yield
e. Adjusting for Inflation

3) Project Appraisal and Capital Budgeting

a. Capital Budgeting and the NPV Rule
b. Payback
c. Internal Rate of Return
d. Profitability Index

4) Introduction to Risk and Return

a. Risky Asset Returns
b. Characterizing Asset Returns
c. Risk and Horizon
d. The IID Assumption and its implications
e. Empirics on Risk and Return

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5) Portfolio Selection
a. Portfolios of Two Assets
b. Diversification
i. The Importance of Correlation
ii. Systematic and Unsystematic Risk
iii. Significance of Diversification
c. Optimal Portfolio Selection
i. Portfolio Frontier with Two Assets
ii. Portfolio Frontier with Multiple Assets
iii. Portfolio Frontier with a Safe Asset
iv. Frontier Portfolios
d. Main Points of Modern Portfolio Theory

6) The Capital Asset Pricing Model

a. The Market Portfolio
b. From Portfolio Selection to the CAPM
c. Implications of CAPM
d. Estimating Betas
e. Understanding Betas
f. Calculating the Risk Adjusted Discount Rate of a Project
g. The Weighted Average Cost of Capital
h. Empirical Evaluation of CAPM

7) Financing and Capital Structure

a. Empirical Evidence on Capital Structure
b. Modigliani-Miller Irrelevance Proposition
i. Cheap Debt Fallacy
ii. How leverage Affects the Cost of Capital
iii. Calculating the Cost of Capital
c. Capital Structure and Corporate Taxes
i. Debt Tax Shield
ii. Modigliani-Miller with Corporate Taxes
iii. Implications
d. Cost of Financial distress
e. Optimal Capital Structure

8) Interest Rates and the Valuation of Bonds

a. Fixed-Income Markets. US Government Bonds
b. Information in Bond Prices
i. Spot Interest Rates. Term Structure of Interest Rates.
ii. Discount Bond
iii. Coupon Bonds
iv. Yield to Maturity
v. Forward Interest Rates
c. Properties of Bond Prices
d. Interest Rate Risk - and Maturity - and Coupon Rates
i. Measures of Interest Rate Risk (Duration and Modified Duration)
e. Credit Risk and Corporate Bonds

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i. Default Risk

9) Options and Option Pricing

a. Options
i. Definitions
ii. Payoff of Options
b. Put-Call Parity
c. Option Strategies
d. Comparative Statics
e. American Options and Early Exercise
f. Option Pricing
i. One Period; Two Periods Binomial Model
ii. Black-Scholes Formula

10) Corporate Securities as Real Options

a. Implementing a Pricing Model
i. Historical Volatility
ii. Implied Volatility
b. Option Greeks
i. Delta, Gamma
ii. Theta, Vega, Rho
c. Real Options - Applications to Corporate Securities
i. Zero-Coupon Bonds
ii. Senior and Junior Zero coupon Bonds
iii. Warrants
iv. Convertibles
d. Exotic Options
i. Barrier Options
ii. Lookback Options
iii. Asian Options

11) The Valuation of Companies and Stocks

a. Characteristics of Common Stock
b. Valuation Using Dividends
c. Modeling Cash Flows
i. with Constant Growth
ii. with Multiple Growth
iii. Commonly Employed Ratios
iv. Growth and New Investments
d. Growth Opportunities and Growth Stocks
e. Stock Price and Earnings per Share

12) Agency Problems

a. Revisiting the Capital Structure Trade-off Theory
b. Incentive Problems
i. Moral Hazard and Credit Rationing
ii. Jensen Meckling. Effort and Risk shifting problems.
c. Investment Problems
i. Debt holders vs. Equity holders. Debt Overhang Problem

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ASSIGNMENTS:
Assignments consist of problem sets (individual work not to be covered in class) and case studies (pre
determined group work to be covered in class).

RECOMMENDED BOOK AND PREREQUISITES:

Brealey, Richard and Stewart Myers - Principles of Corporate Finance, New-York: McGraw-Hill.

The prerequisites for the course include working knowledge of calculus, probability, statistics, linear algebra.

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F300 Corporate Finance

Aims and Objectives:
The objective of this course is to present some major theoretical concepts of modern corporate finance. The ideas
behind those theories and their rationale will be discussed, and related empirical research will be examined. The
course will also acquaint students with the methodology used in corporate finance, helping them to follow advances
in corporate finance research on their own.

Topics

1. Capital Structure—Agency and Information

a. Asymmetric information
b. Empirical work on capital structure and information
2. Payout Policy
a. Dividends and share repurchases
b. Empirical work on dividend policy
3. Corporate Governance
a. Agency costs, monitoring, regulation
b. Empirical work on corporate governance
4. Corporate Control and Take Overs
a. Control rights allocation
b. Effective control and inefficient monitoring
c. Takeovers
5. Financial Intermediation
a. Banks as delegated monitors
b. Banks as liquidity providers
c. Empirical work on financial intermediation
6. Zombie firms
a. What are zombie firms and why do they exist
b. What is their influence on the economy
c. Zombies after Covid
7. CEOs
a. Potential biases and other characteristics
b. Why do they behave the way they behave
c. How to measure their behaviour

Assessment: The examination for this module will be by a 2-hour written exam.

Pre-readings: In what follows, BDM refers to the text Corporate Finance, by Berk and DeMarzo (2017). While the
course is largely self-contained, it will be assumed that you already understand the material covered in BDM chapters
3 and 4. Topics covered in these chapters include (1) arbitrage, (2) the law of one price, (3) decision making criteria
and (4) the time value of money. It will also be assumed that you understand the balance sheet of the firm, covered
in BDM chapter 2.

Readings:
The main text for the course is:
• Berk, J. and P. DeMarzo (2017): Corporate Finance, 4th edition, Pearson.
The following text cover similar material at roughly the same level and is a good supplementary text:

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• Grinblatt, M. and S. Titman (1998): Financial Markets and Corporate Strategy, McGraw-Hill.
The material on asymmetric information will in part draw on the following text:
• Tirole, J. (2006): The Theory of Corporate Finance, Princeton.
The following text contains advanced treatments of several relevant topics close to the research frontier:
• Amaro de Matos, J. (2001): Theoretical Foundations of Corporate Finance, Princeton.
Last, the following text introduces the core concepts of corporate finance at an elementary level:
• Brealey, R. A. and S. C. Myers (2003): Principles of Corporate Finance, McGraw-Hill.

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F400 Asset Pricing

Topics
The topics to be covered are:
Basic Concepts:
Absolute Risk Aversion
Relative Risk Aversion
Certainty Equivalence
Portfolio Analysis
The Capital Asset Pricing Model (CAPM)
Static Equilibrium Asset Pricing:
The Stock-Market Economy
Arrow-Debreu Securities
State Prices
Risk-Neutral Pricing
Consumption-Based Capital-Asset Pricing (CCAPM)
Dynamic Equilibrium Asset Pricing:
The Multiperiod Model
Dynamic Completeness
Risk-Neutral Pricing
Stochastic Discount Factor
Static Arbitrage Pricing:
Using Options to Increase the Asset Span
Butterfly Spreads
Arbitrage
The Law of One Price
Dynamic Arbitrage Pricing:
The Binomial Model
Arbitrage
European Call Options
Stochastic Calculus:
Wiener Process
The Wiener Process as a Limit of Random Walks
Stochastic Differential Equations
Itô’s Lemma
Geometric Wiener Process
Expected Discounted Values and Partial Differential Equations
The Black-Scholes Model:
The Black-Scholes Equation
Forward Contracts
European Call Options
European Put Options
The Greeks
Exotic Options:
American Options
Barrier Options
Lookback Options
Asian Options

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Term Structure and Interest Rates:

Models of Bond Prices
One-Factor Equilibrium Models
Models of the Affine Class
Vasicek Model
Cox-Ingersoll-Ross Model
Heath-Jarrow-Morton Model

Assessment
The examination for this module will be by a 2-hour written exam.

Readings
Background Reading:
For those with less of a financial background, the early chapters of
Hull, J.C.: “Options, Futures and Other Derivatives”, any recent edition (e.g. 7th, 8th or 9th)
may be helpful. For those with less of a mathematical background, the early chapters of
Björk, Tomas (2009): “Arbitrage Theory in Continuous Time”, any recent edition (e.g. 2nd or 3rd)
would be useful preparation for the main course.

The main textbooks for the course will be:

Danthine, Jean-Pierre and Donaldson, John B. (2005): “Intermediate Financial Theory”, 2nd edition, Academic Press.
Chapters 1-13.
Björk, Tomas (2009): “Arbitrage Theory in Continuous Time”, 3rd edition, Oxford University Press. For the
applications, we will focus mainly on Chapters 7 (Arbitrage Pricing), 9 (Parity Relations and Delta Hedging), 16
(Dividends), 18 (Barrier Options), 22 (Bonds and Interest Rates), 23 (Short-Rate Models), 24 (Martingale Models for
the Short Rate), 25 (Forward Rates). However, many students will want to refer back to some of the preceding
chapters as the need arises.

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F500 Empirical Finance (take home exam)

Instructor: Oliver B. Linton: Room 25; obl20@cam.ac.uk

Hours: Wednesdays 4-5pm
Time and Location: 18 hours of lectures in Lent Term
Course Description: This course is an introduction to some major topics in empirical Finance. It aims to
endow the student with an understanding of the current issues, methods, and conclusions of empirical
research on financial markets. The focus is primarily on equity markets. There will be an emphasis on
models and methods as well as on empirical results and their interpretation. The course will draw heavily
on the Campbell, Lo and MacKinlay text, and my own notes, which will be provided online. The course
will be intermediated through Moodle, where extra problems, and their solutions will be disseminated.
There will be three problem sets, some questions of which will require the use of a software package such
as Eviews or Matlab. Solutions will be provided.
The main text used is my book, which was published at the end of January 2019
Linton, O. The Models and Methods of Financial Econometrics. Cambridge University Press. January
2019. ISBN 97811071177154 (hardback), 9781316630334 (paperback), 9781316819302 (ebook)
It is closely related to the book
J. Campbell, A. Lo, and C. MacKinlay The Econometrics of Financial Markets Princeton University Press
Also useful books include:
Hasbrouck, J. (2007). Empirical Market Microstructure. Oxford University Press.
Taylor, S.J. (2005). Asset Price Dynamics, Volatility, and Prediction. Princeton University Press.

Outline:
There are nine lectures of two hours each. The topics covered include:
The Predictability of Asset Returns:
Efficient Markets Hypothesis and Random Walk
Autocorrelation based methods; Variance ratio statistics
Nonlinear methods such as Cowles-Jones, sign tests
Empirical results
Empirical Market Microstructure
Non trading model
Roll model
Glosten models for bid ask spread
Empirical results

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Event Study Analysis

Testing the EMH
Standard Methodology
Stock Splits
The Capital Asset Pricing Model
Testable implications
Testing intercept hypotheses
Two step method
Empirical results
Multifactor Pricing Models
Diversification and pervasiveness
Testing APT with observable factors
Identifying and estimating statistical factors
Empirical results
Present Value Relations
Fundamental model of stock prices
Bubbles: Rational and other
Time varying risk premium
Testing: excess volatility tests and predictive regression
Empirical results
Intertemporal Equilibrium Pricing
Consumption CAPM
Risk premium puzzle
Other approaches
Empirical results
Models of Changing Volatility
Implied volatility
Realized Volatility
Discrete time GARCH models
Empirical results

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F520 Behavioural Finance

Lecturer: Dr Edoardo Gallo

Outline: The course introduces students to behavioral finance. This area of research examines how
psychological factors have an impact on the behaviour of asset prices, corporate finance, and various
financial institutions and practices. In the first part, we explore how several heuristics rules-of-thumb
people use to make decisions) are important in choice we make in finance and other contexts. Next, we use
some of these heuristics to construct prospect theory – a model of decision-making that is an empirically-
driven alternative to the standard expected utility framework. The central part of the course is dedicated
to the role emotions, altruism, and the tendency to imitate others play in the functioning of financial
markets. In the final part of the course we apply what we learnt to two critical types of financial decisions:
saving for retirement and investing in stocks.

Most readings for the course are selected chapters from the following books:
• Ackert, L. and Deaves, R., 2009. Behavioral finance: Psychology, decision-making, and markets.
Cengage Learning.
• Montier, J., 2002. Behavioral Finance. Insights into Irrational Minds and Markets. John Wiley &
Sons.
• Shefrin, H., 2002. Beyond greed and fear: Understanding behavioral finance and the psychology
of investing. Oxford University Press on Demand.
Below is the list of topics for each lecture with associated readings.

1. Introduction to the course and behavioral finance.

• Ackert and Deaves, chapters 1 and 2.
• Shefrin, chapter 4.
• Shleifer, A., 2000. Inefficient markets: An introduction to behavioural finance. Chapter 1.
• De Bondt, W.F. and Thaler, R., 1985. Does the stock market overreact?. The Journal of Finance,
40(3), pp.793-805.

2. Heuristics and biases: Representativeness, availability and anchoring.

• Shefrin, chapter 2.
• Ackert and Deaves, chapter 5.
• Montier, chapter 1.
• Tversky, A., and Kahneman, D., “Judgment under Uncertainty: Heuristics and Biases,” Science 185,
1974, 1124-31.

3. Heuristics and biases: Framing, loss aversion and status quo.

• Shefrin, chapter 3.
• Montier, chapter 1.
• Tversky, A., and Kahneman, D., “The Framing of Decisions and the Psychology of Choice.” Science,
211(4481), 1981,s 45358.
• Kahneman, D., Knetsch, J.L. and Thaler, R.H., “Experimental Tests of the Endowment Effect
and the Coase Theorem,” JPE, 98 (6), 1990, 1325-1348.

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4. Prospect theory.
• Montier, 1.3.2.
• Shefrin, chapter 9.
• Ackert and Deaves, chapter 3.
• Benartzi, S. and Thaler, R.H., 1995. Myopic loss aversion and the equity premium puzzle. The
Quarterly Journal of Economics, 110(1), pp.73-92.

5. Investor sentiment.
• Shleifer, A., 2000. Inefficient markets: An introduction to behavioural finance. Chapter 6.
• Shefrin, chapter 6.
• Baker, M. and Wurgler, J., 2007. Investor sentiment in the stock market. Journal of Economic
Perspectives, 21(2), pp.129-152.

6. Herding.
• Forbes, W., 2009. Behavioural finance. Chapter 11.
• Banerjee, A.V., 1992. A simple model of herd behavior. The Quarterly Journal of Economics,
107(3), pp.797-817.
• DeMarzo, P.M., Vayanos, D. and Zwiebel, J., 2003. Persuasion bias, social influence, and
unidimensional opinions. The Quarterly Journal of Economics, 118(3), pp.909-968.

7. Other-regarding preferences.
• Ackert and Deaves, chapters 11 and 12.
• Fehr, E. and Gchter, S., 2000. Fairness and retaliation: The economics of reciprocity. Journal of
Economic Perspectives, 14(3), pp.159-181.
• Healy, P.M. and Palepu, K.G., 2003. The fall of Enron. Journal of Economic Perspectives, 17(2),
pp.3-26.

8. Application: Retirement savings.

• Shefrin, chapter 11.
• Ackert and Deaves, chapters 17 and 18.
• Benartzi, S. and Thaler, R.H., 2001. Naive diversification strategies in defined contribution saving
plans. American Economic Review, 91(1), pp.79-98.
• Thaler, R.H. and Benartzi, S., 2004. Save more tomorrow: Using behavioral economics to increase
employee saving. Journal of Political Economy, 112(S1), pp.S164-S187.

9. Application: Investments.
• Shefrin, chapters 7-10.
• Ackert and Deaves, chapter 19.

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F530 Venture Capital in the Innovation Economy

Lecture 1: 18 January 2022 - Introduction and Overview

Economic Growth as Evolutionary Process
Innovation and Uncertainty
Creative Destruction
Who innovates?
Who finances innovation?
Frontier and Followers

Readings:
W. H. Janeway, Doing Capitalism in the Innovation Economy (2nd edition)
(Cambridge University Press, 2018), pp. 1-10, 55-64, 77-101;
J. A. Schumpeter, Business Cycles: Theoretical, Historical and Statistical Analyses of the
Capitalist Process, (London: McGraw-Hill, 1939), vol. I, pp. 72-129, available at
https://www.vle.cam.ac.uk/pluginfile.php/8005832/mod_page/content/97/Counter%20F530_
8.pdf
J. A. Schumpeter, Capitalism, Socialism and Democracy (London, Allen & Unwin, 2010 [1943]),
Part II: “Can Capitalism Survive”, pp. 51-120 [eBook to be available];
J. M. Keynes, The General Theory of Employment, Interest and Money, chapter 12:
“The State of Long Term Expectations” available at
https://www.files.ethz.ch/isn/125515/1366_KeynesTheoryofEmployment .
C. Perez, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and
Golden Ages (Cheltenham UK: Edward Elgar, 2002), pp. xvii-xix, 3-35, 71-126;
R. Zeckhauser, “Investing in the Unknown and Unknowable,” Capitalism and
Society, Vol. 1: Issue 2, Article 5 (2006).

Lecture 2: 19 January 2022 - Formal Models of Growth and Innovation

Models of Economic Growth

Accounting for Technical Change
Endogenizing Innovation
Ignoring Market Risk
What the Models Leave out
Readings:
P. Aghion and Howitt, P., The Economics of Growth Cambridge MA: MIT Press,
2009), Introduction and chapters 4 and 5.

Lecture 3: 25 January 2022 – What Venture Capitalists Do

The canonical venture capital model

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Launching projects versus building businesses

The limited scope of VC investments
The biotechnology paradox
VCs versus Entrepreneurs
Managing Uncertainty

Readings:
P. Gompers, Gornall, W., Kaplan, S. N., Strebulaev, I. A., “How Do Venture
Capitalists Make Decisions?” Journal of Financial Economics, 135 (2020) pp. 169-
190.
Janeway, Doing Capitalism in the Innovation Economy, pp. 144-152;
M. R. Kerr, Nanda, R., Rhodes-Kropf, M., “Entrepreneurship as Experimentation,”
Journal of Economic Perspectives, 28:3, Summer 2014, pp. 25-48;
National Venture Capital Association Yearbook 2020, pp. 9-12, available at
https://nvca.org/research/nvca-yearbook/
Pitchbook and NVCA, Venture Monitor, available at https://nvca.org/research/pitchbook-nvca-
venture-monitor/

Lecture 4: 26 January 2022 - Evaluating Venture Capital Performance

The stylized facts of venture capital
Skewness of returns
Persistence of returns
Correlation of returns with the Stock Market
The Unicorn Bubble
The dual dependency: Speculation and the State

Readings:
U. Akcigit, Dinersoz, E., Greenwood, J., and Penciakova, V., “Synergizing Ventures,” NBER
Working Paper 02138, August 2019.
J. Lerner and Nanda, R., “Venture Capital’s Role in Financing Innovation: What We Know and
How Much We still have to Learn,” Journal of Economic Perspectives, 34(3), Summer 2020, pp.
237-261.
R. S. Harris, Jenkinson, T. and Kaplan, S. N., “Private Equity Performance: What
Do We Know?”, Journal of Finance vol. 69: 5, (October 2014) pp. 1851–1882;
R. S. Harris, Jenkinson T., Kaplan S. N., Stucke, R., “Has Persistence Persisted in
Private Equity? Evidence from Buyout and Venture Capital Funds,” NBER Working
Paper 28109, November 2020;
W. H. Janeway, Nanda, R., and Rhodes-Kropf, M., Venture Capital Booms and Startup Financing.
Harvard Business School working paper 21-116 (2021), available at
https://www.billjaneway.com/venture-capital-booms-and-startup-financing .

Lecture 5: 1 February 2022 - The Failure of “Market Failure”

Knowledge as public good with dynamic increasing returns

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Inability to calculate, let alone capture, returns to innovation

Appropriation of returns versus free dissemination
Conflict between “static” and “dynamic” efficiency
Vannevar Bush: the myth of the “The Endless Frontier”
“Mission-oriented” funding: the Defense Department and the NIH

Readings:
U. Akcigit, Hanley, D., Serrano-Velarde, N., “Back to Basics: Basic Research Spillovers,
Innovation Policy and Growth,” Review of Economic Studies, vol. 88, pp. 1-43 (2021)
K. Arrow, “Economic Welfare and the Allocation of Resources for Invention,”
Essays in the Theory of Risk-bearing, Ch. 6, Pp. 144-163, available at
https://www.vle.cam.ac.uk/pluginfile.php/8005832/mod_page/content/97/Counter%20F530_
15.pdf
S. Belenzon and Cioaca, L. C., “Guaranteed Markets and Corporate Scientific Research,” NBER
Working Paper 28644, April 2021
N. Bloom, Schankerman, M., and Van Reenen, J., “Identifying Technology
Spillovers and Product Market Rivalry,” Econometrica 81:4 (2013), 1347-1393, pp.
117-233
K. R. Fabrizio and Mowery, D., “The Federal Role in Financing Major Innovations: Information
Technology during the Postwar Period,” in Lamoreaux and Sokoloff, pp. 283-316
R. R. Nelson, “The Simple Economics of Basic Scientific Research,” Journal of
Political Economy, 67(1959), 297-306

Lecture 6: 2 February 2022 – The Banality of Bubbles

The historical record: 1690s-1990s

Distinguishing Bubbles: Equity Bubbles vs. Credit Bubbles
Unpacking the “Super-Bubble” of 1982-2008
Lessons from the literature: “How long can you afford to be wrong?”
Reasoning about (ir)rationality

Readings:
Janeway, Doing Capitalism, pp. 155-204;
O. Jorda, Schularick, M. and Taylor, A. M., “Leveraged Bubbles,” Journal of Monetary
Economics, Vol. 76, Supplement, pp. S1-20, available at
https://www.sciencedirect.com/science/article/abs/pii/S0304393215000987?via%3Dihub
C. P. Kindleberger and Aliber, R. Z. (2005), Manias, Panics and Crashes: A History of Financial
Crises, 5th edition. Basingstoke, England: Palgrave Macmillan, pp. 1-122;
J. A. Scheinkman, Speculation, Trading and Bubbles (Columbia University Press,
New York NY, 2014), pp. 7-40, 63-87.
H. Shin, Risk and Liquidity (Oxford University Press, 2010), pp. 1-27, 96-131 and
152-170;

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A. Shleifer and R. Vishny, “The Limits of Arbitrage,” Journal of Finance, 52, no. 1 (1997), pp. 32–
55

Lecture 7: 8 February 2022 - The Necessity of Bubbles

Keynes’ Bridge/Tobin’s Q
Market Valuation of Financial Assets/Reproduction Cost of Real Assets
Financing Risk and Financing Constraints
Financing Innovation at the Frontier: London versus New York
Hot Markets and Cool Stuff

Readings:
G. M. Angelotos, Lorenzoni. G. and Pavan, A., “Beauty Contests and Irrational Exuberance: a
Neoclassical Approach”, NBER WP, No., 15883, January 2010;
J. R. Brown, Fazzari, S. M. and Peterson, B.C., “Financing Innovation and Growth: External
Equity and the 1990s R&D Boom,” Journal of Finance, 64(1) 2009, pp. 151-185;
Janeway, Doing Capitalism, pp. 205-237;
Nanda, Ramana and Matthew Rhodes-Kropf, “Financing Risk and Innovation,” Management
Science 63, no. 4 (April 2017): 901–918;
Nanda, R. and M. Rhodes-Kropf, “Investment Cycles and Startup Innovation,”
Journal of Financial Economics, 110, no. 2 (November 2013): 403-418;
J. Tobin and Brainard, W.C., “Asset Markets and the Cost of Capital”, Cowles
Foundation paper no. 440, reprinted in Private values and Public Policy: Essays in
Honor of William Fellner (Amsterdam: North-Holland, 1977) pp. 235-262.

Lecture 8: 9 February 2022 – Exploring New Economic Space

“What is this stuff good for?” – Market Risk

Railroads: mail order = “the killer app”
Electrification: street lights and street cars, amusement parks, flexible
manufacturing, home appliances...and...and...and
ICT: data processing, data analytics, office automation, CAx, ERP, customer
self-service, social media, digital services and...and...and
Dynamics of General Purpose Technologies
Who explores: large enterprise or new firm?
Large Enterprises: innovator’s dilemma
New Firms: entrepreneurs and their financiers
The Hybrid Schumpeter Mark III Model
Are New Ideas Getting Harder to Find

Readings:

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A. Arora, Cohen, W. M., and Walsh, J. P., “The Acquisition and Commercialization of Invention in
American Manufacturing: Incidence and Impact,”, Research Policy (July 2016), 45(6), pp. 1113-
1128.
A. Arora, Belenzon, S., Patacconi, A., Suh, J., “The Changing Structure of American
Innovation, Some Cautionary Remarks for Economic Growth: NBER Working
Paper 25893, May 2019
T. Bresnehan, “General Purpose Technologies” in Hall and Rosenberg (2010), pp.
761-791;
N. Bloom, Jones, C. I., Van Reenen, J., and Webb, M., “Are Ideas Getting Harder to
Find,” American Economic Review, 2020, 110 (4), 1104-41.
B. DeLong (2003), “Profits of Doom”, Wired 11.04.);
D. E. Nye, Electrifying America: Social Meanings of a New Technology (Cambridge MA: MIT
Press, 1992), pp. 1-28, 381-391;

Lecture 9: 15 February 2022 - Historical Sources of Technological Innovation [Prof.

Sriya Iyer]

Why Britain? Why Then?

The Industrial Enlightenment versus Factor Prices
Appropriation versus Protection of Intellectual Property
From Mechanical Tinkering to Fundamental Science
From Corporate Labs to the Department of Defense
Interdependence of Science and Technology
New Opportunities for Followers in the Digital Economy
Readings:
R. C. Allen, “The British Industrial Revolution in Global Perspective: How Commerce Created the
Industrial Revolution and Modern Economic Growth,” available at
http://www.nuff.ox.ac.uk/users/allen/unpublished/econinvent-3.pdf.
G. Clark, “A Review Essay on The Enlightened Economy: An Economic History of Britain 1700–
1850 by Joel Mokyr,” Journal of Economic Literature,(2012), pp. 85-95.
N. Lamoreaux and K. Sokoloff, eds., Financing Innovation in the United States, “Introduction:
The Organization and Finance of Innovation in American History (MIT Press, Cambridge MA,
2007), pp. 1-37.
J. Mokyr, “The Contribution of Economic History to the Study of Innovation and Technical
Change,” in B. W. Hall and Rosenberg, N., Handbook of the Economics of Innovation
(Amsterdam: Elsevier, (2010), pp. 11-50.
D. C. Mowery and Rosenberg, N., Technology and the Pursuit of Economic Growth (Cambridge
University Press, 1989), pp. 3-168.
D. Breznitz, Innovation and the State: Political Choice and Strategies for Growth in Israel,
Taiwan and Ireland (New Haven and London, Yale University Press, 2007) pp. 1-40, 190-207.

Lecture 10: 16 February 2022 - The Path to the Frontier [Prof. Sriya Iyer]

Limits of Historical Experience

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The Path of the Follower

The Lewis Model and its Policy Relevance
The Role of Industrial Policy
Inclusive Economic and Political Institutions

Readings
W. H. Janeway, “Two Innovation Economies” available at https://www.billjaneway.com/two-
innovation-economies-1
W. A. Lewis, (1954), ‘Economic development with unlimited supplies of labour’, Manchester
School 22.
https://www.vle.cam.ac.uk/pluginfile.php/8005832/mod_page/content/108/Counter%20F530
_16.pdf?time=1638184328691
M. Todaro and S. Smith (2011), Economic Development, Chapter 3, pp.115-120.
R. Cherif and F. Hasanov. 2019. ‘The Return of the Policy That Shall Not Be Named: Principles of
Industrial Policy’, IMF Working Paper WP/19/74.
D. Acemoglu and J. Robinson, Why Nations Fail: The Origins of Power, Prosperity and Poverty
(New York NY: Crown Business, 2012, pp. 74-6.

Lecture 11: 22 February 2022 - The Digital Revolution and the State

The Defense Department’s commitment to computing

The Internet and the Cloud
The Productivity Puzzle
Globalization, Automation, Financialization
Readings:
D. Acemoglu and Restrepo, P., “The Race between Man and Machine: Implications
of Technology for Growth, Factor Shares and Employment,” American Economic
Review 2018, 108(6),
D. Autor, Dorn, D., Hanson, G. H., “On the Persistence of the China Shock,” NBER Working
Paper 29401, October 2021.
S. Greenstein, “Innovative Conduct in Computing and Internet Markets,” in Hall
and Rosenberg, Economics of Innovation, pp. 477-537.
Janeway, Doing Capitalism, pp. 294-316;
D. Rodrik, The Globalization Paradox: Why Global Markets, States, and Democracy Can’t
Coexist, (Norton, New York, 2011), chs. 1, 5-6, 10-11.

Lecture 12: 23 February 2022 - The Next New Economy

The Missing Mission: Response to Climate Change

The American Abdication
Will China Lead?
More Innovation Needed

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Readings:
Carbon Pricing Leadership Coalition, Report of the High-Level Commission on Carbon Prices
(“Stern-Stiglitz Report”), May 27, 2019, available at
https://static1.squarespace.com/static/54ff9c5ce4b0a53decccfb4c/t/59244eed17bffc0ac256cf16/
1495551740633/CarbonPricing_Final_May29.pdf .
J. Helverston and Nahm, J., “China’s Key Role in Scaling Low-Carbon Energy Technologies,”
Science, 15 Nov 2019. Vol. 366, Issue 6467, pp. 794-796
D. Popp, Pless, j., Hascic, I., Johnstone, N., “Innovation and Entrepreneurship in
the Energy Sector, NBER WP 27145, May 2020.
J. E. Stiglitz, “Addressing Climate Change through Price and Non-Price
Interventions,” NBER Working Paper 25939, June 2019.
R. Way, Ives, M., Mealy, P., and Farmer, J. D., “Empirically Grounded Technology
Forecasts and the Energy Transition,” INET Oxford Working Paper No. 2021-01, 14
September 2021, available at https://www.inet.ox.ac.uk/files/energy_transition_paper-INET-
working-paper.pdf

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F540 Topics in Applied Asset Management

Lecturer: Professor Mark Salmon

This course will address a number of practical issues that arise in contemporary asset management and
portfolio design. The intention is to provide you with both practical tools and theoretical insight into the
quantitative techniques used (and difficulties faced) by asset managers in delivering performance on a daily
basis. This implies some empirical work and you will have to become proficient (not an expert) in the
programming language R- there are associated classes in R for Finance provided for the course but you
should try to pick up the basics yourself by following an online Coursera R course before F540 starts. R is
easy to learn, there is a lot of on-line support and is one of the leading software packages for empirical
analysis in the finance industry (along with Python) and will be useful if you are looking for a job in the
Finance Industry or moving on to further research at the end of the year.
Evaluation will be through an empirical project using R together with take home theoretical questions related
to the empirical work- no exam. There will be weekly reading lists- largely drawn from the applied literature
– there is no set text - and empirical exercises largely through the R course. I will draw on my own experience
from working in fixed income, market neutral Long Short Equity funds and a managed futures hedge fund
(CTA) throughout the course to give you practical insights. I will try to cover several specific trading
strategies in some form; Market neutral equity, Smart Beta and ETF’s- factor models, convergence
trades/statistical arbitrage and both cross-sectional and time series momentum in futures markets.
In recent years Machine Learning tools have been rapidly adopted by many systematic strategies and we
will spend some time critically evaluating the tools used this area. There are significant advantages but also
potentially serious dangers through the naïve use of Machine Learning methods in asset management. The
principle issue is the confusion between correlation and causality with Machine Learning based prediction.
We will spend time on this issue this year and also there will be some emphasis on rebalancing strategies and
multiple hypothesis testing or what is known as p-hacking in factor selection.
Three broad themes will be covered;
1. Portfolio design; position sizing- Universe selection, different notions of diversification and risk,
the practical limitations of mean variance analysis in reality as opposed to theory and alternative
approaches- Constraints, Parametric Portfolios, factor based allocation, volatility timing, smart beta
and risk parity.
2. Conditional asset allocation; signal generation- the central role of the causal predictability of (risk
adjusted) returns and volatility measurement to asset allocation, feature selection, the proper use of
machine learning, multiple hypothesis testing, spanning, Instrumented Principal Component Analysis
and finally and briefly..
3. Risk management and Performance Evaluation- tools for controlling risk and
monitoring/evaluating performance

The provisional lecture outline is below but I will not rush through the material and some issues may not
be able to be covered in the time we have available.

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Topic 1. Failures of Mean Variance in practice.

The shape of the risk return trade off, the efficient frontier and static Mean Variance Allocation-
universe choice-CAPM- index choice. The role of leverage, what do we mean by risk and
diversification- the lessons of 2008. Why does 1/N appear to dominate mean variance portfolio
allocation? Rebalancing, transactions costs, money management and cost minimization

Topic 2. Alternatives to Mean Variance and volatility timing

Direct Optimisation, large covariance matrices alternative approaches to measuring risk- copula
based robust risk measures, weight restrictions‐ beta and market neutral ,Brandt and Santa Clara,
Higher Moments. Parametric Portfolios , 1/N in risk, Risk Parity in its various forms, volatility
managed portfolios, Min Variance – Smart Beta- Low vol/beta anomaly.

Topic 3. Predictability:
Predictable risk premia and market efficiency, state dependence and pockets of predictability,
Machine Learning- review and alternative data. Causality and prediction. Economic and statistical
loss functions, Directional prediction: asymmetric loss.

Topic 4. Factor models, ETF’s, Regimes

Factor based allocations; CAPM and APT, size , value, growth, momentum… The factor zoo p-
hacking and multiple hypothesis testing. Covariances vs Characteristics, Instrumented Principal
Component Analysis, Regimes, sentiment and style rotation, ESG investing.

Topic 5. Strategy Case Study 1: Momentum trading in the cross section and trend following

Topic 6. Risk Management and performance evaluation

Value at Risk, Expected Shortfall, Maximum Drawdown, trading limits and the impact of leverage,
stop loss rules. Backtesting and Manipulation Proof measures of performance, Stochastic
Dominance, Tail dependence , concordance copulae and failures of correlation.

Topic 7. Strategy Case Study 2: Convergence trades

Mean reversion, statistical arbitrage and pairs trading.

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Reading:
Most of the reading will be taken from journal articles, one or two articles a week, but I will make
reference to the following texts:

1) Quantitative Equity Portfolio Management, Qian, Hua and Sorenson (2007), Chapman Hall
2) Introduction to Risk Parity and Budgeting, Thierry Roncalli, (2013), Chapman Hall
3) Asset Pricing and Portfolio Choice Theory, Kerry Back, 2nd Edition(2017), OUP .
4) Empirical Asset Pricing- Models and Methods, Wayne Ferson- (2019), MIT Press......or at a more
abstract level
5) Asset Pricing, revised edition, Cochrane, (2005),Princeton University Press
6) Introduction to Econometrics, Stock and Watson,(2019), for a reminder, if needed, what Econometric
Causality means.

Pre-reading for the course:

Campbell, J. Y. (2014). Empirical asset pricing: Eugene Fama, Lars Peter Hansen, and Robert Shiller.
Scandinavian Journal of Economics, 116(3):593-634.

and/or

RSAS (2013). Understanding asset prices. Compiled by the Economic Sciences

Prize Committee of the Royal Swedish Academy of the Sciences (RSAS). Avail-
able at http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/
2013/advanced-economicsciences2013.pdf.

If you have not done any finance courses before ( Economics MPhil.) then read as much of the following
book as you can:-

Kinlaw, Kritzman and Turkington; (2021) (2nd edition) Asset Allocation: from theory to practice and
beyond. Wiley

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F550 Research Methods and Topics in Finance

Instructor: Prof. Lin Peng (lp604@cam.ac.uk)

Overview
This course introduces students to topical issues in empirical finance, covering three broad themes: investor
attention, learning and market efficiency; social networks and financial markets; climate finance and ESG.
The goal of the course is to bring insights from the latest academic research and to teach students how to
apply economic principles and tools in solving applied problems in finance. The course will introduce
relevant theoretical foundations and review current empirical research in the corresponding areas. The class
builds on materials that students have learned in Fin100, Fin200, and the econometric skills they acquired in
E300.
Course description
We first focus on the theme of investor attention and financial markets. Information plays a crucial role
in financial markets, and information is only incorporated into prices when market participants pay
attention to and act on the information. In reality, attention is a scarce cognitive resource (Kahneman
1973). Limited investor attention thus substantially impacts information processing and investor decisions.
We survey the emerging literature on the effect of investor attention on financial markets. We go over
theoretical models of limited attention, discuss empirical measures used to capture investor attention, and
review empirical evidence of how attention affects asset prices and corporate finance outcomes.
Next, we turn to the area of social finance. In classical models of information in asset markets, people
learn from others only indirectly through observation of market prices or quantities observed in markets.
However, as Aristotle famously noted, humans are, by nature, social animals. As a result, social
interactions are likely to influence many dimensions of decision-making by economic agents. We review a
growing empirical literature that studies the role of social networks in financial markets. We summarize
recent work showing how social network influences investment decisions, household decisions, and capital
allocation to firms. In the process, we introduce newly available data from Facebook, the world’s largest
social network platform, which provides a rare opportunity to measure real-world social networks at a
population scale.
Finally, we review the nascent and rapidly growing field that studies environment, social and governance
(ESG), climate change, and financial markets. Climate change is an existential threat to humankind; it
also poses a substantial risk to the financial system. We discuss the physical and transition risks associated
with climate change and the implications for investors and firms. We also review the studies on the role of
institutional investors on corporate sustainability and the challenges we currently face in measuring ESG.

Organization
The course consists of 18 hours of lectures in Lent Term.

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Readings
Most of the reading will be taken from review chapters, journal articles, and working papers assigned by
the professor.
Assessment
The examination for this module will be by a two-day take-home exam.

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S101 Public Economics

Aims and Objectives

This course covers the foundations for optimal taxation based largely on the seminal work of Ramsey (1927)
and Mirrlees (1971). The goal of the course is to familiarize students with basic empirical methods and
theoretical models in applied microeconomics, with a focus on connecting theory to data to inform economic
policy. Topics include efficiency costs and incidence of taxation, inequality, optimal income and commodity
taxation.

There are 5 main topics to be covered in the lectures. There will also be four classes. Preparation for this class
will involve manipulating data using Stata.

Topic s
1. Consumer Demand and Standards of Living
2. Welfare and Taxation: Who bears the cost?
3. Government Intervention: Theory of the Second Best and How to Intervene
4. Government Intervention: Production Efficiency and Redistribution
5. Inequality and Taxing the Rich

Assessment
The examination for this module will consist both on coursework and an online exam written exam. The final
mark will be a weighted average of the two with coursework having a weight of 40% and the exam a weight
of 60%.

Readings
A good introduction to a number of the topics can be found in:
• Hindriks and Myles “Intermediate Public Economics”
• Various chapters in: “Dimensions of Tax Design: the Mirrlees Review”, J. Mirrlees,
S. Adam, T. Besley, R. Blundell, S. Bond, R. Chote, M. Gammie, P. Johnson, G. Myles and J. Poterba
(eds), Oxford University Press, 2010. Chapters can be downloaded from
http://www.ifs.org.uk/mirrleesReview

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S201 Applied Macroeconomics

Aims and Objectives
This course analyses the effect of monetary and fiscal policy on economic activity from both a theoretical
and empirical perspective. We will introduce a simple monetary economic model from which we can
discuss the efficacy of policies, and how these change when the economy is in a liquidity trap.
Furthermore, we will discuss identification issues in structural vector autoregressions (SVARs), and
empirically assess policy implications.

Topics
Identification in SVARs
Empirical regularities
Introducing money in economic models (CIA, MiU, and the cashless limit).
Six monetary doctrines
The equation of exchange (or quantity equation)
Deficits (may) cause inflation
Fiscal prerequisites of zero inflation policy
Unpleasant monetarists arithmetic
Neutrality of money
The Friedman rule
Fiscal and monetary policy in normal times.
Depression economics:
Liquidity traps
Internal devaluations
Quantitative easing
The importance of commitment: Price-level and NGDP targeting
Fiscal policy

Assessment
The examination is comprised by two parts: One written project (30%) and one exam (70%).

Readings
Useful books
Recursive Macroeconomic Theory, 2nd edition, by Lars Ljungqvist and Thomas Sargent (LS)
Monetary Theory and Policy, by Carl E. Walsh (CW)
Monetary Policy, Inflation, and the Business Cycle, by Jordi Gali (JG)
Interest & Prices, by Michael Woodford (MW)
Advanced Macroeconomics, fourth edition by David Romer. (Chapter “The Zero Lower Bound on the
Nominal Interest Rate” (pp. 550-554))
Structural Vector Autoregressive Analysis by Lutz Kilian and Helmut Lutkepohl. (Link: http://www-
personal.umich.edu/∼lkilian/book.html)1
None of the above books are necessary, but may be useful (in particular the book by Walsh). Your lecture
notes will take you a long way.

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Articles
1) “Evil is the root of all money”, Nobuhiro Kiyotaki and John
Moore:http://www.princeton.edu/∼kiyotaki/papers/Evilistherootofallmoney.pdf
2) Krugman, Paul R. “It’s baaack: Japan’s Slump and the Return of the Liquidity Trap”.
Brookings Papers on Economic Activity, vol. 2, 1998. (This is an excellent article, please
read).
3) Ramey, Valerie. “Macroeconomic Shocks and Their Propagation”. NBER Working Paper
21978, 2016. http://econweb.ucsd.edu/∼vramey/research/Shocks HOM Ramey.pdf
4) Eggertsson, Gauti, and Michael Woodford. “The Zero Bound on Interest Ratesand Optimal
Monetary Policy.” Brookings Papers on Economic Activity, vol. 1, 2003.

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S130 Economics of Ageing

Lecturer: Prof. Eric French, eric.french.econ@gmail.com

DESCRIPTION: This course covers areas of active empirical research on the economics of aging. We
will cover OLG, adverse selection, and life cycle savings and labor supply models as well as empirical
evidence on these models. Specific topics include the role of savings incentives on individual and national
savings, the annuities market, and the effects of public pensions and disability insurance programs on labor
supply and savings.
Assessment: 3 hour online exam, with four questions. Exam content will include both derivations and short
essay questions. These will include interpretations of derivations as well as questions relating to key
empirical results in the literature.
Problem sets: 3 problem sets. These problem sets will not contribute to your grade, but they will help
prepare you for your exam.
Sources of data on ageing populations and pension systems
OECD web site (click on the Ageing Society link):
http://www.oecd.org/maintopic
World Bank pensions and pension reform web site:
http://www.worldbank.org/pensions
Links to useful UK official data, publications and statistics online
http://www.ifs.org.uk/weblinks.php?code=stt
Reading list (* denotes the most important papers)
1. Economic Implications of Population Aging
Bloom, D., and D Luca, “Chapter 1 - The Global Demography of Aging: Facts, Explanations, Future”, in
Handbook of the Economics of Population Aging, Volume1A, John Piggott Alan Woodland eds., 2016, 3-
56.
Diamond, Peter, “A Framework for social security analysis”. Journal of Public
Economics, Vol 8, No 3, pp 275-298, December 1977
2. Some Distributional Aspects of Govt Pensions
Samuelson, P., “An exact consumption-loan model of interest with or without the social contrivance of
money”, The Journal of Political Economy, Vol. 66, No. 6. (Dec., 1958), pp. 467-482.
Diamond, Peter A. "National debt in a neoclassical growth model." The American Economic Review 55.5
(1965): 1126-1150.

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Attanasio, O., A. Bonfatti, S. Kitao, G. Weber, “Chapter 4 - Global Demographic Trends: Consumption,
Saving, and International Capital Flows”, in Handbook of the Economics of Population Aging,Volume1A,
John Piggott Alan Woodland eds., 2016.
3. The economics of pensions and annuities
Finkelstein, A., Poterba, J., 2002. Selection effects in the market for individual annuities: new evidence
from the United Kingdom. Economic Journal 112, 28–50.
*Finkelstein, A., Poterba, J., 2004. Adverse selection in insurance markets: policyholder evidence from the
U.K. annuity market. Journal of Political Economy 112, 183–208.
*Mitchell, Olivia S., J Poterba, J., Warshawsky, P. and Brown, J., "New Evidence on the Money's Worth of
Individual Annuities," American Economic Review, vol. 89(5), pages 1299-1318, December.
O’Dea, Cormac, and David Sturrock, “Survival Pessimism and the Demand For Annuities", IFS working
paper, forthcoming at Review of Economics and Statistics.
4. The life-cycle model and saving for retirement: do People Prepare Adequately for Retirement?
Banks, J., R. Blundell, S. Tanner, “Is there a retirement-savings puzzle?” The American Economic Review,
(1998).
*Bernheim, B. Douglas, Jonathan Skinner and Steven Weinberg, “What Accounts for the Variation in
Retirement Wealth Among U.S. Households?” The American Economic Review, 91 (2001), 832-857.
Aguiar, Mark and Erik Hurst (2005): “Consumption vs. Expenditure” Journal of Political Economy, 113,
919-948.
*Scholz, John Karl, Ananth Seshadri and Surachai Khitatrakun (2006): “Are Americans Saving 'Optimally'
for Retirement?” Journal of Political Economy, 114, 607-643.
Michael Hurd, Susann Rohwedder, The Retirement-Consumption Puzzle: Anticipated and Actual Declines
in Spending at Retirement, manuscript, 2005.
Chetty, R., J. Friedman, S. Leth-Petersen, T. Nielsen, T. Olsen, Active vs. Passive Decisions and Crowdout
in Retirement Savings Accounts: Evidence from Denmark, The Quarterly Journal of Economics, Volume
129, Issue 3, August 2014, Pages 1141–1219.
O’Dea, C. and R. Crawford, ``Household portfolios and financial preparedness for retirement",
Quantitative Economics 11(2): 637-670 (May 2020)
*Attanasio, OP, S Rohwedder, “Pension wealth and household saving: Evidence from pension reforms in
the United Kingdom”, American Economic Review, 93 (5), 1499-1521, 2003.
Attanasio, OP, S Rohwedder, Social security and households' saving, the Quarterly Journal of economics
118 (3), 1075-1119, 2003.
Lachowska, Marta, and Michał Myck. "The effect of public pension wealth on saving and expenditure."
American Economic Journal: Economic Policy 10.3 (2018): 284-308.
5. Savings Patterns After Retirement

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Hurd, M. ``Mortality and Bequests," Econometrica, 1989, 57(4), 779-813.

*DeNardi, M., E. French and J. Jones, “Why do the Elderly Save? The Role of Medical Expenses”,
Journal of Political Economy, February 2010, 118(1): 37-75.
Lockwood, Lee, “Incidental Bequests”, American Economic Review, 108 (9), 2513-50, 2018.
Ameriks, John, J. Briggs, Andrew Caplin, Matthew D Shapiro, Christopher Tonetti, “Long-Term Care
Utility and Late in Life Saving”, Journal of Political Economy, 2020.
6. Labor Force Participation and Retirement
Blundell, Richard, Eric French and Gemma Tetlow, “Retirement Incentives and Labour Supply” Handbook
of the Economics of Population Aging, Piggott and Woodland, eds, 2016, 458-556.
*French, Eric, “The Effects of Health, Wealth and Wages on Labor Supply and Retirement Behavior,”
Review of Economic Studies, 2005, 72(2), 395-427.
Rust, John and Christopher Phelan, "How Social Security and Medicare affect Retirement Behavior in a
World of Incomplete Markets," Econometrica,65 (4), July 1997, 781-831.
French, Eric and John Bailey Jones, “The Effects of Health Insurance and Self-Insurance on Retirement
Behavior”, Econometrica, Vol. 79, No. 3 (May, 2011), 693–732.
“Nonparametric Evidence on the Effects of Financial Incentives on Retirement Decisions”, Dayanand
Manoli and Andrea Weber, AEJ: Policy, 2016.
Cribb, J., C. Emmerson, and G. Tetlow, “Signals matter? Large retirement responses to limited financial
incentives”, Labour Economics, 2016.
Richard Rogerson and Johanna Wallenius, “Nonconvexities, Retirement and the Elasticity of
Labor Supply”, AER, 2013.
*French, Eric, Attila Lindner, Cormac O’Dea, Tom Zawisza, “Labor Supply and the Pension Contribution-
Benefit Link”.
Kolsrud, Jonas, Camille Landais, Daniel Reck and Johannes Spinnewijn, “Retirement Consumption and
Pension Design”.
7. The link between Health and Economic Position at older ages
Blundell, Richard Jack Britton, Monica Costa Dias, Eric French, "The impact of health on labor supply
near retirement", Journal of Human Resources, 2020.
Smith, James P. “Healthy Bodies and Thick Wallets: The Dual Relation Between
Health and Economic Status,” Journal of Economic Perspectives 13 (2), Spring 1999:
145-166.
Case, Anne and Angus Deaton, Rising morbidity and mortality in midlife among white non-Hispanic
Americans in the 21st century, PNAS December 8, 2015 112 (49) 15078-15083.

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*Raj Chetty, Michael Stepner, Sarah Abraham, Shelby Lin, Benjamin Scuderi, Nicholas Turner, Augustin
Bergeron, David Cutler, The association between income and life expectancy in the United States, 2001-
2014, Journal of the American Medical Association, 2016.
8. Disability Insurance: Impacts on Labor Supply, Retirement, Consumption
Bound, J. and R. V. Burkhauser (1999), "Economic analysis of transfer programs targeted on people with
disabilities", in: Orley Ashenfelter and David Card, eds., Handbook of Labor Economics 3C (Elsevier
Science B.V., Amsterdam) 3417-3525.
Autor, David H and Mark G. Duggan (2003): “The Rise in the Disability Rolls and the Decline in
Unemployment,” Quarterly Journal of Economics, 118(1), February, 157-206.
Black, Dan A, K. Daniel and S. Sanders (2002): “The Impact of Economic Conditions on Participation in
Disability Programs: Evidence from the Coal Boom and Bust,” American Economic Review, 92, 27-50.
Bound, John (1989): "The Health and Earnings of Rejected Disability Insurance Applicants," American
Economic Review, 79, 482-503.
Meyer, Bruce D., and Wallace K. C. Mok: “Disability, Earnings, Income and Consumption” Working
Paper, University of Chicago. Journal of Public Economics, 2019.
*French, Eric and Jae Song, “The Effect of Disability Insurance Receipt on Labor Supply”, American
Economic Journal: Policy, 2014.
Maestas, Nicole, Kathleen J. Mullen, Alexander Strand, “Does Disability Insurance Receipt Discourage
Work? Using Examiner Assignment to Estimate Causal Effects of SSDI Receipt,” AMERICAN
ECONOMIC REVIEW, VOL. 103, NO. 5, AUGUST 2013, pp. 1797-1829.
*A. Kostol, G. Dahl, and M. Mogstad, “Family Welfare Cultures”, Working Paper, Quarterly Journal of
Economics 129 (4), 1711-1752, 2014.
Low, H., and L. Pistaferri, “Disability Insurance and the Dynamics of the Incentive Insurance Trade-Off”,
The American Economic Review 105 (10), 2986-3029.

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S140 Behavioural Economics

Lecturers: Christopher Harris and Wolfram Schultz

Course Coordinator: Christopher Harris

Course Description: This course offers an introduction to the behavioural approach to economics. Among
the topics covered are behavioural game theory, intertemporal decision making, neuroeconomics, cognitive
biases, decision-making heuristics and addiction. The course includes both theoretical and empirical
material, but a recurring theme is the importance of experimental findings both in the laboratory and in the
field.

Course Structure: The course will consist of 7 two-hour lectures by Christopher Harris and 1 two-hour
lecture by Wolfram Schultz.

Lecture Day: Tuesday. Starting Tuesday January 21st and ending Tuesday March 10th.

Lecture Time: 14:00-16:00.

Guest Lecture: Wolfram Schultz’s lecture will be on Tuesday March 3rd.

Method of Assessment: 2-hour written exam. Past exam papers can be found online. These give a good
indication of the style of question, but the content of the questions varies with the material taught. Here are
four examples:

2018-19: Exam paper for S140 for Easter 2019. Possible address:
https://www.vle.cam.ac.uk/mod/resource/view.php?id=10621022

2017-18: Exam paper for S140 for Easter 2018. Possible address:
https://www.vle.cam.ac.uk/mod/resource/view.php?id=10609482

2016-17: Exam paper for M140 for Easter 2017. Possible address:
https://www.vle.cam.ac.uk/mod/resource/view.php?id=10612472

2015-16: Exam paper for M140 for Easter 2016. Possible address:
https://www.vle.cam.ac.uk/mod/resource/view.php?id=10612942

The links to Moodle may or may not work. (Moodle does not seem to have anything resembling a stable
URL for links.) A better approach is to navigate directly to the relevant Moodle page.

Background Reading: There is no required textbook for the course. However, you may enjoy the following
readings that cover many of the topics of the course for a non-academic audience:

1. Elster J (1998): Emotions and Economic Theory , Journal of Economic Literature, vol. 36, no. 1, pp.
47-74.

2. Kahneman, D., Thinking, Fast and Slow, Farrar, Straus and Giroux, 2011.

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3. Thaler, R. H. and Sunstein, C.R., Nudge: Improving Decisions About Health, Wealth, andHappiness,
Penguin Books, 2009.

4. Glimcher, P. (2003): Decisions, Uncertainty and the Brain, MIT Press, Cambridge MA.

Main Reading:

1. Alvin E. Roth, Vesna Prasnikar, Masahiro Okuno-Fujiwara and Shmuel Zamir: Bargaining and Market
Behavior in Jerusalem, Ljubljana, Pittsburgh, and Tokyo: An Experimental Study, The American
Economic Review, Vol. 81, No. 5 (Dec., 1991), pp. 1068-1095.
[Stable URL: http://www.jstor.org/stable/2006907 ]

2. Robert Forsythe, Joel L. Horowitz, N.E. Savin and Martin Sefton: Fairness in Simple Bargaining
Experiments, Games and Economic Behavior, Volume 6, Issue 3, May 1994, pp
347-369.
[DOI: https://doi.org/10.1006/game.1994.1021 ]

3. Ernst Fehr and Klaus M. Schmidt: A Theory of Fairness, Competition, and Cooperation, The Quarterly
Journal of Economics, Vol. 114, No. 3 (Aug., 1999), pp. 817-868.
[Stable URL: http://www.jstor.org/stable/2586885 ]

4. Fehr E. and Gachter, S. (2000): Cooperation and Punishment in Public Goods Experiments, American
Economic Review, vol. 90(4), pp 980-94.
[Stable URL: http://www.jstor.org/stable/117319 ]

5. Binmore, K and Shaked, A (2010): Experimental economics: Where next? , Journal of Economic
Behavior & Organization 73 (2010) 87 100.
[DOI: https://doi.org/10.1016/j.jebo.2008.10.019 ]

6. Nagel, Rosemarie (1995): Unraveling in Guessing Games: An Experimental Study, American

Economic Review, Vol. 85, No. 5., pp 1313-1326.
[Stable URL: http://www.jstor.org/stable/2950991 ]

7. Camerer, Colin and Teck-Hua Ho (1999): Experience-Weighted Attraction (EWA) Learning in

Normal-Form Games , Econometrica, 67, 827-74. [Stable URL: http://www.jstor.org/stable/2999459
]

8. Ted O Donoghue and Matthew Rabin: Doing It Now or Later, American Economic Review,
Vol. 89, No. 1 (Mar., 1999), pp. 103-124
[Stable URL: http://www.jstor.org/stable/116981 ]

9. Harris, Christopher and Laibson, David (2001): Dynamic Choices of Hyperbolic Consumers ,
Econometrica, Vol. 69, No. 4, pp. 935-957.
[Stable URL: http://www.jstor.org/stable/2692249 ]

10. Amador, M, Werning, I and Angeletos, G-A (2006): Commitment vs. Flexibility , Econometrica 74,
No. 2, pp. 365-396.
[Stable URL: http://www.jstor.org/stable/3598805 ]

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11. Shunsuke Kobayashi and Wolfram Schultz (2008): In uence of Reward Delays on Responses of
Dopamine Neurons, Journal of Neuroscience, 28 (31) 7837-7846.
[DOI: https://doi.org/10.1523/JNEUROSCI.1600-08.2008 ]

12. Joseph W Kable & Paul W Glimcher (2007): The neural correlates of subjective value during
intertemporal choice, Nature Neuroscience, Volume: 10, Issue: 12, Page: 1625-1633, [DOI:
https://doi.org/10.1038/nn2007 ]

13. McClure, Berns & Montague (2003): Temporal Prediction Errors in a Passive Learning Task Activate
Human Striatum, Neuron, 38, 339 346.
[DOI: https://doi.org/10.1016/S0896-6273(03)00154-5 ]

14. Stau⁄er WR, Lak A, Schultz W (2014): Dopamine reward prediction error responses re ect marginal
utility, Curr Biol 24: 2491-2500.
[DOI: https://doi.org/10.1016/j.cub.2014.08.064 ]

14b Pastor-Bernier, Stasiak & Schultz (2019): Orbitofrontal signals for two-component choice options
comply with indi⁄erence curves of Revealed Preference Theory ,
[DOI: https://doi.org/10.1038/s41467-019-12792-4 ]

15. De Martino B, Kumaran D, Seymour B, Dolan R (2006): Frames, biases, and rational decision-making
in the human brain, Science 313, 684-687.
[DOI: https://doi.org/10.1126/science.1128356 ]

16. Lakshminarayanan, V., M. K. Chen, and L. R. Santos (2008). Endowment E⁄ect in Capuchin Monkeys.
Philosophical Transactions of the Royal Society B: Biological Sciences 363, pp 3837 3844.
[DOI: https://doi.org/10.1098/rstb.2008.0149 ]

17. List, J.A. (2003): Does Market Experience Eliminate Market Anomalies? Quarterly Journal of
Economics, 118(1), 41-71.
[Stable URL: http://www.jstor.org/stable/25053898 ]

18. Tversky, A., and Kahneman, D. (1974): Judgment under Uncertainty: Heuristics and Biases, Science
185, 1124-31.
[DOI: https://doi.org/10.1126/science.185.4157.1124 ]

19. Beggs, A., and K. Graddy (2009). Anchoring E⁄ects: Evidence from Art Auctions. American Economic
Review 99, pp 1027 1039.
[Stable URL: http://www.jstor.org/stable/25592492 ]

20. Gary S. Becker, Kevin M. Murphy (1988): A Theory of Rational Addiction , The Journal of Political
Economy, Vol. 96, No. 4 (Aug., 1988), pp. 675-700. [Stable URL:
http://www.jstor.org/stable/1830469 ]

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S150 Economics of Networks

Our opportunities and our choices are shaped by our connections. The awareness that connections matter
leads us to invest in them. These investments give rise to networks of friendship, the world wide web,
supply chains, research alliances, transport links, and many other networks we see around us. These
observations have inspired an exciting new research programme in economics which examines the origins
and implications of networks. The course will introduce students to this research, including the following
topics:
• Network formation
• Network structure and human behaviour
• Production networks and supply chains
• Infrastructure
• Intermediaries and platforms
• Financial contagion
• Communities and Development
• Trust
Format: There will be nine lectures of two hours each. To master the material, students are encouraged to
work out problem sets which will be provided during the course.
Method of assessment: Final exam.
Textbooks
*Goyal, S. (2021). Principles of Networks: An economics approach. (The course will draw primarily on
this book).
Easley, D. and J. Kleinberg (2010). Networks, Crowds and Markets.
Goyal, S. (2007). Connections: An introduction to the economics of networks.
Jackson, M. (2008). Social and economic networks.
Rauch, J. and A. Casella (2001). Networks and Markets.
Review articles
Goyal, S. (2017). “Networks and Markets”, in Advances in Economics and Econometrics: Eleventh World
Congress of the Econometric Society, edited by B. Honore, A. Pakes, M. Piazzesi and L. Samuelson.
Goyal, S. (2016). “Networks in Economics: A Perspective on the Literature”, in The Oxford Handbook of
the Economics of Networks, edited by Y. Bramoulle, A. Galeotti and B. Rogers.
Jackson, M. Rogers, B. and Y. Zenou (2017). “The economic effects of social network structure”, Journal
of Economic Literature.
References to articles detailing material discussed in the lectures will be given during the course.

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S170 Industrial Organisation

A vast range of economic transactions take place in markets. The nature of competition in markets affects,
and is affected by, many decisions taken by firms. The field of Industrial Organisation studies these
interactions. The course will introduce students to the field, including the following topics:
• Price and quantity competition
• Product differentiation
• Horizontal mergers
• Collusion
• Vertical relations
• Entry, entry deterrence and accommodation
• Networks and intermediaries

Format: There will be nine lectures of two hours each. In addition, five two-hour classes will help students
to work through assigned problems.
Method of assessment: Final exam.
Textbooks
Industrial Organisation
*Belleflamme, P. and M. Peitz (2015). Industrial Organization: Markets & Strategies, 2nd edition,
Cambridge University Press. (This book provides a comprehensive up-to-date overview of the field).
*Pepall, L., D. Richards and G. Norman (2011). Contemporary Industrial Organization: A Quantitative
Approach, John Wiley & Sons.
Tirole, J. (1988). The Theory of Industrial Organization, MIT Press. (This is the classic textbook on
Industrial Organisation, well worth reading, but does not cover recent developments).
Competition Policy
Motta, M. (2004). Competition Policy: Theory & Practice, Cambridge University Press.
(Specifically on platforms and competition policy, the following review article provides a very recent
discussion: Jullien, B. and W. Sand-Zantman (2021) “The Economics of Platforms: A Theory Guide for
Competition Policy”, Information Economics and Policy).
References to articles detailing material discussed in the lectures will be given during the course.

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S301 Applied Econometrics

LECTURERS: Dr C Rauh & Dr N Amano Patino

Aims
The aim of this module is to enable students to follow modern applied econometric papers and critically
interpret empirical output, including an understanding of the limitations imposed by the econometric
techniques and the data available. The emphasis throughout will be on intuitive treatment of the issues
rather than detailed technical derivations. This will include discussion of empirical papers that address
policy issues via data analysis.

Books
There are several very good books covering aspects of this course including
- Angrist and Pischke, Mostly Harmless Econometrics
- Angrist and Pischke, Mastering Metrics
- Wooldridge, Econometric Analysis of Cross Section and Panel Data
- Scott Cunningham, Causal Inference: The Mixtape
- Cameron and Trivedi, Microeconometrics

Topics
The lecture courses for this paper are as follows:

Dr C. Rauh, 9 hours, weeks 0-4

1. Potential outcomes framework
2. Randomised control trials
3. Regression/selection on observables
4. Instrumental variables
5. Difference-in-differences
6. Regression discontinuity

Dr. N. Amano Patino, 9 hours, weeks 4-9

1. Heckman correction
2. Oaxaca-Blinder decomposition
3. GMM and SMM
4. A foundation for bootstrap

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S500 Development

Lecturer: Professor Sriya Iyer (si105@cam.ac.uk)

Course Content
This course on Development (18 hours, Lent Term) is a course in development economics, which deals
with the economic problems of poor countries. This course considers some of the main theoretical and
analytical issues in development economics as well as the historical development process of now-
developed countries. It deals with cutting-edge research in development economics which is relevant to
understanding the economic problems of developing countries, both in the present day and over the past
two centuries.
Aims of the Course
The aims of the course are to introduce participants to conceptual tools and empirical findings relevant to
understanding the economic problems of developing countries. By the end of this course, students should
have acquired a basic knowledge and understanding of the following core conceptual tools and theoretical
debates in contemporary development economics:
• Growth and development
• Poverty and inequality
• Education, technology and innovation
• Mutual insurance
• Finance and savings
• Weather and climate
• Health and pandemics
• Representative democracy
• Religion, social capital and conflict

Schedule of Lectures
There will be 18 hours of lectures, taught in 9 sessions of two hours each, on Fridays from 11am-1pm. The
format for lectures and discussion will be that readings for each lecture will be prescribed in advance of the
lecture. Each session will deal with about 2-3 readings. Students will be divided into small groups. The
lecturer will first provide an overview of the main issues for that topic and then a group of students
collectively will be asked to discuss one of the papers for that session. Over the duration of the course all
students participating in the course must participate in at least one or more paper discussions in one of the 9
sessions. Which paper to discuss and by whom will be agreed beforehand at the first lecture in Week 1.

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Readings
A detailed reading list for all topics will be provided at the first lecture. This will form the basis of the
readings for this course and discussions within it. This course will draw upon the following books as
background material:
Acemoglu, Daron, and James Robinson (2013). Why Nations Fail: The Origins of Power, Prosperity and
Poverty. London: Profile Books.
Banerjee, Abhijit V. and Esther Duflo (2011). Poor Economics: A Radical Rethinking Of The Way To
Fight Global Poverty. New York : PublicAffairs.
Deaton, Angus (2013). The Great Escape: Health, Wealth, and the Origins of Inequality. Princeton:
Princeton University Press.
Ray, Debraj (1998). Development Economics, Princeton, NJ.
Sachs, Jeffrey (2005). The End of Poverty: Economic Possibilities for Our Time. Penguin Press.

Assessment
The form of assessment for this course will be one 4000 word Take-Home Essay on any topic of the
student’s choosing, but which needs to fall within the purview of one of the major topics covered in the
course. A clear link must be demonstrated in the Essay as to how the topic relates to the material covered in
the course. The Essay can cover theoretical models, experimental evidence, as well as empirical evidence
from the historical or contemporary contexts of developed or developing countries. The Essay needs to be
submitted by the deadline of 11 April 2022.

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Paper 1 Development Economics (Module borrowed from Development

Studies)

Introduction

Development economics is characterised by diversity in many senses. First of all, it is diverse in terms
of the subject matter. Anything from household decisions regarding fertility and labour allocation to climate
change and global financial architecture can be a subject of research in development economics. It is also
diverse in terms of the level of abstraction in discussion. Someone who works on abstract theories of growth
has as much legitimate claim to be a “development economist” as does someone who works on the political
economy of industrial policy, say, in Thailand or someone who tries to find out exactly why and how workers
in, say, Nepal, go and work in Qatar or South Korea. Moreover, development economics is diverse in its
methodology, as the field has always included people with differing views of the world – Neo-classicists,
Marxists, Structuralists, Institutionalists, Schumpeterians, and so on. And since the subject is directly
concerned with the real world, and a very unstable and rapidly changing part of it at that, new issues are
constantly coming up. Global value chains (GVCs), conditional cash transfers and migrant remittances are
only some of the issues that have become prominent, rightly or wrongly, during the decade or so. Old topics
also come back into fashion – inequality, agrarian changes, and development banking are the most prominent
recent examples.

Reflecting the nature of the subject, the course covers a wide range of issues and is taught by seven
lecturers with different expertise. The paper is structured in the following way:

I. Core lectures: the course provides a set of 16 two-hour core lectures, giving an introduction to most
of the major issues in development economics. Seven lecturers with diverse theoretical, thematic, and
regional expertise are involved in these lectures.
II. Discussion Classes: core lectures are followed by a small-group discussion class in which the students
will discuss the themes taught in the lectures with teaching assistants.

Method of assessment

The assessment is by means of one essay (3,000 words; 35 percent of final mark) submitted during the winter
break (between the Michaelmas and the Lent terms) and another essay (4,000 words; 65 percent of final
mark) due in the Easter term. The first essay will be more theoretical and conceptual, while the second one
will be on more concrete topics. Over the final weeks of Michaelmas, students will be assigned to a small
group (of around 5) session with the teaching assistants, dedicated to planning, drafting and editing their first
essays. The exact timings and allocations will be communicated in due course.

Structure of the Paper

I. Core Lectures

The core lectures, consisting of a one-hour lecture and a one-hour Q&A, will be held every Tuesday between
11:00 am and 1:00 pm for the first two terms, except the ones marked with an asterisk.

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Each individual lecturer will distribute the lecture material through Moodle (e.g., the reading list, lecture
notes, powerpoint presentation, background papers – the exact material to be distributed depends on the
lecturer). The indicative key reading list for each lecture is appended at the end of this document.

Michaelmas

1. Market, State, and Economic Development I (Ha-Joon Chang) 12 October

2. Market, State, and Economic Development II (Ha-Joon Chang) 19 October

3. Globalisation, Policy Space, and Economic Development (Natalya Naqvi) 26 October

4. Industrialisation, International Trade and Economic Development (Jostein Hauge) 2 November

5. Poverty, Capabilities, and Economic Development (Pedro Mendes Loureiro) 9 November

6. Why is Inequality So unequal across the World? (Gabriel Palma) 4pm-6pm, 11 November*

7. Property Rights Issues in Economic Development (Ha-Joon Chang) 23 November

8. The East Asian Development Experience (Ha-Joon Chang) 30 November

Lent

9. The African Economic Development Experience (Jostein Hauge) 25 January

10. The Latin American Development Experience (Gabriel Palma) 4pm-6pm, 27 January*

11. Finance and Economic Development (Natalya Naqvi) 8 February

12. Social Policy and Development (Pedro Mendes Loureiro) 15 February

13. Global Value Chains and Economic Development (Jostein Hauge) 22 February

14. Labour, Globalisation, and Development (Natalya Naqvi) 1 March

15. Financial Crises (Gabriel Palma) 4pm-6pm, 3 March*

16. Macroeconomic Issues in Economic Development (Pedro Mendes Loureiro) 15 March

*Please note: Lectures by Gabriel Palma take place on Thursdays. The corresponding discussion classes will take
place on the Tuesday following the lecture (i.e., the classes for his lectures on 11 November, 27 January, and 3 March
will be on 16 November, 1 February, and 8 March).

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II. Discussion Classes

There will be weekly one-hour discussion classes. All participants are required to read the key readings for
that week before the discussion class (See the list below). Key readings are articles or book chapters on
themes related to the lecture of the week. Discussion classes will be conducted around those common
readings, although not simply on them.

The students will be organised into small discussion groups led by one of our teaching assistants, Mateus
Labruine and Georges Quist. These classes will be held in-person with social distancing if the pandemic
condition permits but they will be held through Zoom if not. In compliance with university regulation, these
classes will not be recorded.

The detailed arrangements for the discussion classes will be announced, once we know the student numbers.

Please note: Lectures by Gabriel Palma take place on Thursdays. The corresponding discussion classes will
take place on the Tuesday following the lecture (e.g., the classes for his lecture on 12 November will be on
17 November).

Key Indicative Readings for the Lectures

Michaelmas

1. Market, State, and Economic Development I AND 2. Market, State, and Economic Development II
(Ha-Joon Chang)

Chang, H-J., Kicking Away the Ladder? – Development Strategy in Historical Perspective, especially ch. 2
Chang, H-J., ‘Breaking the Mould – An Institutionalist Political Economy Alternative to the Neo-Liberal
Theory of the Market and the State’, Cambridge Journal of Economics, 2002, vol. 26, no. 5.
Evans, P., Embedded Autonomy - States and Industrial Transformation, chs. 1-3.
Hirschman, A., ‘The Rise and Decline of Development Economics’ in Essays in Trespassing.
Krueger, A., ‘Government Failures in Development’, Journal of Economic Perspectives, 1990, no. 3
Toye, J., Dilemmas of Development, especially chs. 2-4.

3. Globalisation, Policy Space, and Economic Development (Natalya Naqvi)

Bhagwati, J., (2005) In Defence of Globalisation, Oxford University Press, Introduction.

Garrett, G. (1998). ‘Global markets and national politics: collision course or virtuous circle?’, International
Organization, 52(4), 787-824.
Rodrik, D. (2011). The globalization paradox: why global markets, states, and democracy can't coexist.
Oxford University Press, Introduction.
UNCTAD (2014) Trade and Development Report 2014 – Global Governance and Policy Space for
Development, https://unctad.org/system/files/official-document/tdr2014_en.pdf

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4. Industrialisation, International Trade and Economic Development (Jostein Hauge)

Chang, H-J., ‘How Does Your Garden Grow?’ (chapter 7) in Economics: The User’s Guide.
Lin, J. and Chang, H-J. ‘Should industrial policy in developing countries conform to comparative
advantage or defy it? – A debate between Justin Lin and Ha‐Joon Chang’, Development Policy
Review, 2009, vol. 27, no. 5, pp.483-502.
Wade, R. ‘What strategies are viable for developing countries today? The World Trade Organization and
the shrinking of ‘development space’, Review of International Political Economy, 2003, vol. 10, no.
4, pp. 621-644.

5. Poverty, Capabilities, and Economic Development (Pedro Mendes Loureiro)

Alkire, S., et al. 2017. Changes Over Time in Multidimensional Poverty: Methodology and Results for 34
Countries. World Development, 94, 232-249.
Mosse, D. 2010. A Relational Approach to Durable Poverty, Inequality and Power. The Journal of
Development Studies, 46(7), 1156-1178.
Nussbaum, M. C., 2011. Creating Capabilities: The Human Development Approach. Cambridge, MA:
Harvard University Press. ch. 1 and 4.
Robeyns, I. 2005. The Capability Approach: a theoretical survey. Journal of Human Development and
Capabilities, 6(1), 93-117.
Sen, A., 2009. The Idea of Justice. Cambridge, MA: Belknap Press. ch. 11-12.

6. Why is Inequality So unequal across the World? (Gabriel Palma)

Palma, J. G., ‘Behind the Seven Veils of Inequality. What if it’s all about the Struggle within just One Half
of the Population over just One Half of the National Income?’, Development and Change
Distinguished Lecture 2018, Development and Change, 50(5), 2019. Available at:
https://onlinelibrary.wiley.com/doi/epdf/10.1111/dech.12505
Palma, J. G., Why the Rich Stay Rich. On dysfunctional institutions’ “ability to persist” (no matter what),
Cambridge Working Papers in Economics (CWPE 20124), 2020,
http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe20124.pdf
Palma, J.G., ‘The Amartya Sen Lecture” at the 2020 HDCA Conference’, en https://youtu.be/wY9XFQA-
McA

7. Property Rights Issues in Economic Development (Ha-Joon Chang)

Chang, H-J. Intellectual Property Rights and Economic Development – Historical Lessons and Emerging
Issues’, Journal of Human Development, 2001, vol. 2, no. 2
Chang, H-J., State-owned Enterprise Reform in UNDESA (United Nations Department of Social and
Economic Affairs) (ed.), National Development Strategies – Policy Notes, available at the website,
http://esa.un.org/techcoop/documents/PN_SOEReformNote.pdf
Jaffe, A. & Lerner, J., Innovation and Its Discontents – How Our Broken Patent System Is Endangering
Innovation and Progress, and What to do about It
World Bank, Bureaucrats in Business, ch. 1.

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8. The East Asian Development Experience (Ha-Joon Chang)

Chang, H-J., The Political Economy of Industrial Policy in Korea, Cambridge Journal of Economics, 1993,
no. 2
Chang, H-J., The Hazard of Moral Hazard – Untangling the Asian Crisis, World Development, 2000, April
Stiglitz, J. 1996. Some Lessons from the East Asian Miracle, World Bank Research Observer, August,
1996
Wade, R., Governing the Market, especially chs. 1-3 and 10-11
World Bank, The East Asian Miracle: Economic Growth and Public Policy, the Overview chapter.

Lent

9. The African Economic Development Experience (Jostein Hauge)

Mkandawire, Thandika. ‘The spread of economic doctrines and policymaking in postcolonial Africa’,
African Studies Review, 2014, pp. 171-198.
Jerven, M., Africa: Why Economists Get it Wrong Zed Books, 2015, Introduction and Chapter 1.
Chelwa, G. (2021). "Does economics have an ‘Africa problem’?" Economy and Society, 50(1), pp.78-99.

10. The Latin American Development Experience (Gabriel Palma)

Palma, J. G. (2019), ‘The Chilean economy since the return to democracy in 1990. On how to get an
emerging economy growing, and then sink slowly into the quicksand of a “middle-income trap”’,
Cambridge Working Papers in Economics (CWPE1991),
http://www.econ.cam.ac.uk/research/cwpe-abstracts?cwpe=1991
Palma, J. G. (2010), ‘Why has productivity growth stagnated in most Latin American countries since the
neo-liberal reforms?’, en JA Ocampo y J Ros (eds.), The Oxford Handbook of Latin American

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economics, Oxford University Press. Available at: Cambridge Working Papers in Economics
(CWPE) 1030, http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1030.pdf
Bértola, L. and Ocampo, J. A., The Economic Development of Latin America since Independence, Oxford
University Press.

11. Finance and Economic Development (Natalya Naqvi)

Arestis, P., & Demetriades, P. (1997). Financial development and economic growth: assessing the
evidence. The EconomicJjournal, 107(442), 783-799.
King, R. G., & Levine, R. (1993). Finance and growth: Schumpeter might be right. The Quarterly Journal
of Economics, 108(3), 717-737.
Levine, R. (2005). Finance and growth: theory and evidence. Handbook of economic growth, 1, 865-934
Rodrik, D., & Subramanian, A. (2009). Why did financial globalization disappoint?. IMF Staff
Papers, 56(1), 112-138.
Singh, A. (2003). Capital account liberalization, free long-term capital flows, financial crises and economic
development. Eastern Economic Journal, 29(2), 191-216.

12. Social Policy and Development (Pedro Mendes Loureiro)

Andrade, L. O. M., et al. 2015. Social determinants of health, universal health coverage, and sustainable
development: case studies from Latin American countries. The Lancet, 385(9975), 1343-1351.
Cook, S. and Kabeer, N., 2010. Social Protection As Development Policy: Asian Perspectives. London:
Taylor & Francis. ch. 1.
Haggard, S. and Kaufman, R. R., 2008. Development, Democracy, and Welfare States: Latin America, East
Asia, and Eastern Europe. Princeton: Princeton University Press. especially introduction
Handa, S., et al. 2018. Myth-Busting? Confronting Six Common Perceptions about Unconditional Cash
Transfers as a Poverty Reduction Strategy in Africa. The World Bank Research Observer, 33(2), 259-
298.
Korpi, W. and Palme, J. 1998. The Paradox of Redistribution and Strategies of Equality: Welfare State
Institutions, Inequality, and Poverty in the Western Countries. American Sociological Review, 63(5),
661-687.

13. Global Value Chains and Economic Development (Jostein Hauge)

Hauge, J., ‘Industrial Policy in the Era of Global Value Chains: Towards a Developmentalist Perspective
Drawing on the Industrialization Experience of South Korea and Taiwan’, World Economy, 2020,
vol. 43, no. 8, pp. 2,070-2,092.
Gereffi. G., ‘The Emergence of Global Value Chains: Ideas, Institutions, and Research Communities’,
Chapter 1 (pp.1-39) in G. Gereffi, Global Value Chains and Development. Cambridge University
Press, 2018.
Selwyn, B. and Leyden, D. (2021). "Oligopoly-driven development: The World Bank’s Trading for
Development in the Age of Global Value Chains in perspective." Competition & Change

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14. Labour, Globalisation, and Development (Natalya Naqvi)

Amsden, A. H. (1989). Asia's next giant: South Korea and late industrialization. Oxford University Press
on Demand. Ch 8.
Chibber, V. (2012). Organised Interests, Development Strategies and Social Policies. In Growth, Inequality
and Social Development in India (pp. 168-193). Palgrave Macmillan, London.
Rodrik, D. (1999). Globalisation and labour, or: If globalisation is a bowl of cherries, why are there so
many glum faces around the table? In R. Baldwin, D. Cohen, A. Sapir, & A. Venables
(Eds.), Market Integration, Regionalism and the Global Economy (pp. 117-150). Cambridge:
Cambridge University Press. doi:10.1017/CBO9780511599118.010.
Selwyn, B. (2015) ‘Elite Development Theory: A Labour-centred Critique’, Third World
Quarterly, 37 (5): 781–99.
Silver, B. J. (2003). Forces of labor: workers' movements and globalization since 1870. Cambridge
University Press.

15. Financial Crises (Gabriel Palma)

Palma, J. G. (2009), ‘The Revenge of the Market on the Rentiers Why neo-liberal reports of the end of
history turned out to be premature’, Cambridge Journal of Economics 33(4), July. Available at:
Cambridge Working Papers in Economics (CWPE) 0927, http://www.econ.cam.ac.uk/research-
files/repec/cam/pdf/cwpe0927.pdf
Palma, J. G., (2020). ‘Finance as Perpetual Orgy: How the ‘new alchemists’ twisted Kindleberger’s cycle
of “manias, panics and crashes” into “manias, panics and renewed manias”’, Cambridge Working
Papers in Economics (CWPE) 2094, http://www.econ.cam.ac.uk/research-
files/repec/cam/pdf/cwpe2094.pdf
Palma, J. G. (2012), ‘How the full opening of the capital account to highly liquid financial markets led
Latin America to “two and a half” cycles of mania, panic and crash’, en G Epstein and M H
Wolfson, The Handbook on the Political Economy of Financial Crises, Oxford University Press.
Available at: Cambridge Working Papers in Economics (CWPE) 1201,
http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1201.pdf

16. Macroeconomic Issues in Economic Development (Pedro Mendes Loureiro)

Bresser-Pereira, L. C. 2019. New Developmentalism: development macroeconomics for middle-income

countries. Cambridge Journal of Economics, 44(3), 629-646.
Kaltenbrunner, A. and Painceira, J. P. 2015. Developing countries’ changing nature of financial integration
and new forms of external vulnerability: the Brazilian experience. Cambridge Journal of Economics,
39(5), 1281-1306.
Schedelik, M., et al. 2021. Comparative Capitalism, Growth Models and Emerging Markets: The
Development of the Field. New Political Economy, 26(4), 514-526.
Skott, P. 2021. Fiscal policy and structural transformation in developing economies. Structural Change and
Economic Dynamics, 56, 129-140.
Thirlwall, A. P. 2011. Balance of payments constrained growth models: history and overview. PSL Quarterly
Review, 64(259).

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Readings for Discussion Classes

Michaelmas Term

Week 1. Market, State, and Economic Development I (Ha-Joon Chang) 13 October

Chang, H-J. ‘How Have We Got Here? – A Brief History of Capitalism’ (chapter 3) in
Economics: The User’s Guide, Pelican Books, 2014.

Week 2. Market, State, and Economic Development II (Ha-Joon Chang) 20 October

Chang, H-J., ‘Breaking the Mould – An Institutionalist Political Economy Alternative to
the Neo-Liberal Theory of the Market and the State’, Cambridge Journal of
Economics, 2002, vol. 26, no. 5.
Krueger, A., Government Failures in Economic Development, Journal of Economic
Perspective, 1990, no. 3.

Week 3. Globalisation, Policy Space, and Economic Development (Natalya Naqvi) 26

October
Bhagwati, J., In Defence of Globalisation, Oxford University Press, 2005, Introduction.
Rodrik, D. (2011). The globalization paradox: why global markets, states, and democracy
can't coexist, Oxford University Press, 2011, Introduction.

Week 4. Industrialisation, international trade and economic development (Jostein

Hauge) 2 November
H-J. Chang, ‘How Does Your Garden Grow?’ (chapter 7) in Economics: The User’s Guide,
Pelican Books.
Lin, J. and Chang, H-J. ‘Should industrial policy in developing countries conform to
comparative advantage or defy it? – A debate between Justin Lin and Ha‐Joon
Chang’, Development Policy Review, 2009, vol. 27, no. 5, pp.483-502.

Week 5. Poverty, Capabilities, and Economic Development (Pedro Mendes Loureiro)

9 November
Alkire, S., et al. 2017. Changes Over Time in Multidimensional Poverty: Methodology and
Results for 34 Countries. World Development, 94, 232-249.
Mosse, D. 2010. A Relational Approach to Durable Poverty, Inequality and Power. The
Journal of Development Studies, 46(7), 1156-1178.
Hickel, J. 2019. A Letter to Steven Pinker (and Bill Gates, for that matter) About Global
Poverty. Class, Race and Corporate Power, 7(1), 3. [this is a short, informal text to
raise some questions]

Week 6. Why is inequality so unequal across the world? (Gabriel Palma) 4pm-6pm,
11 November*
Palma, G., ‘Why is inequality so unequal across the world? Part 1. The diversity of
inequality in disposable income: multiplicity of fundamentals, or complex

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interactions between political settlements and market failures?’, Cambridge Working

Papers in Economics (CWPE), no. 19-99, 2019. Available at
http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1999.pdf
Palma, G., ‘Why is inequality so unequal across the world? Part 2: the diversity of
inequality in market income ─ and the increasing asymmetry between the distribution
of income before and after taxes and transferences’, Cambridge Working Papers in
Economics (CWPE), no. 19-100, 2019. Availabl at
http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe19100.pdf
A supplementary video lecture:
Palma, G., "What Went Wrong With European Social Democracy: On Building a
Debilitating Capitalism, Where Even the Welfare State Subsidises Greater Market
Inequality". Amartya Sen Lecture at the Human Development and Capability
Association Conference in New Zealand:
https://www.youtube.com/watch?v=wY9XFQA-McA&feature=youtu.be

Week 7. Property Rights Issues in Economic Development (Ha-Joon Chang) 23

November
Acemoglu, D., S. Johnson, and J. A. Robinson (2005), ‘Institutions as the Fundamental
Cause of Long-Run Growth’, in P. Aghion and S. Durlauf (eds.), Handbook of
Economic Growth, Amsterdam: North-Holland, pp. 385–472.
Chang, H-J. ‘Institutions and Economic Development: Theory, Policy, and History’, Journal
of Institutional Economics, 2011, vol. 7, no. 4.

Week 8. The East Asian Developmental Experience (Ha-Joon Chang) 30 November

Wade, R., ‘Escaping the Periphery – The East Asian “mystery” solved’, WIDER Working
Paper, 2018-101
(https://www.wider.unu.edu/sites/default/files/Publications/Working-
paper/PDF/wp2018-101.pdf)
Chang, H-J., How Important were the ‘Initial Conditions’ for Economic Development – East
Asia vs. Sub-Saharan Africa (chapter 4) in H-J. Chang, The East Asian Development
Experience: The Miracle, the Crisis, and the Future, 2006.

Lent Term

Week 9. The African Economic Development Experience (Jostein Hauge) 27

November
Mkandawire, Thandika. "The spread of economic doctrines and policymaking in postcolonial
Africa." African Studies Review, 2014, pp. 171-198.
Jerven, M., Africa: Why Economists Get it Wrong Zed Books, 2015, Introduction and
Chapter 1.

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Week 10. The Latin American Developmental Experience (Gabriel Palma) 4pm-6pm,
27 January*
Palma, G., ‘The Chilean economy since the return to democracy in 1990. On how to get an
emerging economy growing, and then sink slowly into the quicksand of a “middle-
income trap”’, 2019. Available at:
http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1991.pdf

Week 11. Labour Issues in Economic Development (Natalya Naqvi) 8 February

Amsden, A. H. (1989). Asia's next giant: South Korea and late industrialization. Oxford
University Press, Ch 8.
Selwyn, B. (2015) ‘Elite Development Theory: A Labour-centred Critique’, Third World
Quarterly, 37 (5): 781–99.

Week 12. Social Policy and Development (Pedro Mendes Loureiro) 15 February
Fiszbein, A. and Schady, N. R., Conditional Cash Transfers: Reducing Present and Future
Poverty. The World Bank, 2009, p. 1-28.
Franzoni, J. M. and Sánchez-Ancochea, D., The quest for universal social policy in the South:
actors, ideas and architectures, Cambridge University Press, 2016, pp. 3-46.

Week 13. Global Value Chains and Economic Development (Jostein Hauge) 22
February
Hauge, J., ‘Industrial Policy in the Era of Global Value Chains: Towards a
Developmentalist Perspective Drawing on the Industrialization Experience of South
Korea and Taiwan’, World Economy, 2020, vol. 43, no. 8, pp. 2,070-2,092.
Gereffi. G., ‘The Emergence of Global Value Chains: Ideas, Institutions, and Research
Communities’, Chapter 1 (pp.1-39) in G. Gereffi, Global Value Chains and
Development. Cambridge University Press, 2018.

Week 14. Finance and Economic Development (Natalya Naqvi) 1 March

King, R. G., & Levine, R. (1993). ‘Finance and growth: Schumpeter might be right’, The
quarterly journal of economics, 108(3), 717-737.
Singh, A. (2003). Capital account liberalization, free long-term capital flows, financial
crises and economic development. Eastern Economic Journal, 29(2), 191-216.

Week 15. Financial Crises (Gabriel Palma) 4pm-6pm, 3 March*

Palma, G.,‘The Revenge of the Market on the Rentiers Why neo-liberal reports of the end
of history turned out to be premature’, Cambridge Journal of Economics. Vol. 33,
No. 4, 2009. Also in Cambridge Working Papers in Economics (CWPE) 0927;
available at http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe0927.pdf
Palma, G., ‘Finance as a Perpetual Orgy: How the new alchemists twisted Kindleberger’s
“manias, panics and crashes” into “manias, panics and renewed-manias’, CWPE

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2094. Available at https://www.econ.cam.ac.uk/research-

files/repec/cam/pdf/cwpe2094.pdf

Week 16. Macroeconomic Issues in Economic Development (Pedro Mendes

Loureiro) 15 March
Spence, M. 2021. ‘Some Thoughts on the Washington Consensus and Subsequent Global
Development Experience’, Journal of Economic Perspectives, 35(3), 67-82. [If you
want to, read one of the regional pieces that came out in the same volume of the
journal.]
UNCTAD, 2020. Trade and Development Report 2020 - From global pandemic to
prosperity for all: avoiding another lost decade. Geneva: UNCTAD. ch. 2 and 4.

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