Applied Microeconomics FEB12001X

Academic year 2018/2019

Lecturers:
Josse Delfgaauw (Delfgaauw@ese.eur.nl) and Robert Dur (dur@ese.eur.nl )

Tutorials:
Maria Cotofan, Jonas Fürle, Sean Gilbert, Benedikt Kagerer, Andreea Livadariu,
Pierre Robiglio,

Aims
The objective of this course is to learn to apply the concepts and techniques taught in
the first-year Microeconomics course as well as in the Mathematics courses to
problems faced by decision-makers in the public sector as well as in organizations
more generally.

Contents
The course consists of two parts: personnel economics and public economics. The
first part of the course focuses on incentives and workers’ motivation inside
organisations. The role of monetary and non-monetary incentives in motivating,
selecting, and attracting workers to organisations is studied. Topics include the effects
of pay-for-performance on motivating and selecting workers, optimal hiring and firing
policies, education, team-work, promotion tournaments, and benefits.
The second part of the course focuses on how markets are systematically imperfect in
case of public goods, externalities, and asymmetric information. Markets may also
bring about undesirable inequality. We study the role of the government in reducing
the welfare losses that arise when markets do not function perfectly. The limits to
government intervention are also discussed. The effects of taxation and redistribution
are studied, and the normative discussion of government intervention is
complemented by a positive analysis of collective decision-making.

The two parts of the course are lectured in parallel. Each week, the lecture on Tuesday
is devoted to public economics, the lecture on Wednesday to personnel economics,
and the lecture on Friday alternates between the two parts. Also, each week you have
one tutorial on public economics and one tutorial on personnel economics.

Exam material
Selected chapters from the required literature as well as the lecture slides and
exercises. Lecture slides and exercises are published weekly on Canvas.

Required literature
• Harvey S. Rosen and Ted Gayer (2008), Public Finance, 8th ed. (ISBN:
0071259392) or 9th ed. (ISBN: 9780071267885) or 10th ed. (ISBN13
9780077154691), Chapters 1 - 16.

Recommended literature
• Edward P. Lazear (1998), Personnel Economics For Managers, ISBN: 0-471-
59466-0 or Edward P. Lazear en Michael Gibbs (2009), Personnel Economics in
Practice (ISBN 978-0-471-67592-1) or Edward P. Lazear en Michael Gibbs
(2015), Personnel Economics in Practice (ISBN 978-0-471-67592-1).
We also use one chapter (on externalities) of the first-year microeconomics textbook:
R. Frank and Cartwright, Microeconomics and Behavior, Mc Graw-Hill. This is
chapter 16 in the first edition and chapter 18 in the second edition of the book.
Survey of the lectures and required literature
Part A: Personnel Economics OLD BOOK (Lazear (1998), Personnel Economics
for Managers)
No Literature Topic Lecture Tutorial
1 Lazear, Introduction / Hiring 9 January, 10 - 15 Jan
Chapters 1 Standards 13:00-14:45,
and 2 CB-05
2 Lazear, Adverse Selection 16 January, 17 – 22 Jan
Chapter 3 13:00-14:45,
CB-05
3 Lazear, Performance Pay 23 January, 24 - 29 Jan
Chapter 5 13:00-14:45,
CB-05
4 Lazear, Education 30 January, 31 Jan - 5 Feb
Chapter 6 13:00-14:45,
CB-05
5 Lazear, Promotions 1 February, 8 Feb,
Chapters 9 13:00-14:45, 13:00-14:45,
and 10 M1-12 M1-12 (plenair!)
6 Lazear, Team Production 6 February, 7 – 12 Feb
Chapter 12 13:00-14:45,
CB-05
7 Lazear, Seniority Based Pay 13 February, 14 - 19 Feb
Chapters 11 and Benefits 13:00-14:45,
and 15 CB-05
8 Lazear, Nonmonetary 20 February, 20 Feb,
Chapter 14 Compensation and 13:00-14:45, 13:00-14:45,
and 18 Empowerment CB-05 CB-05 (plenair!)
Opportunity to ask 22 February,
questions 15:00 – 16:45
M1-12

Part A: Personnel Economics NEW BOOK (Lazear and Gibbs (2009), Personnel
Economics in Practice)
No Literature Topic Lecture Tutorial
1 Lazear, Introduction / Hiring 9 January, 10 - 15 Jan
Chapter 1 Standards 13:00-14:45,
CB-05
2 Lazear, Adverse Selection 16 January, 17 – 22 Jan
Chapter 2 13:00-14:45,
CB-05
3 Lazear, Performance Pay 23 January, 24 - 29 Jan
Chapter 10 13:00-14:45,
CB-05
4 Lazear, Education 30 January, 31 Jan - 5 Feb
Chapter 3 13:00-14:45,
CB-05
5 Lazear, Promotions 1 February, 8 Feb,
 Chapter 11 13:00-14:45, 13:00-14:45,
(up to p. M1-12 M1-12 (plenair!)
313)
6 Lazear, Team Production 6 February, 7 – 12 Feb
Chapter 8 13:00-14:45,
(up to p. 215 CB-05
7 Lazear, Seniority Based Pay 13 February, 14 - 19 Feb
Chapter 11 and Benefits 13:00-14:45,
(from p. 313) CB-05
and chapter
13
8 Lazear, Nonmonetary 20 February, 20 Feb,
Chapter 15 Compensation and 13:00-14:45, 13:00-14:45,
(from p. 403) Empowerment CB-05 CB-05 (plenair!)
Opportunity to ask 22 February,
questions 15:00 – 16:45
M1-12

Part A: Personnel Economics NEW BOOK (Lazear and Gibbs (2015), Personnel
Economics in Practice, Third edition)
No Literature Topic Lecture Tutorial
1 Lazear, Introduction / Hiring 9 January, 10 - 15 Jan
Chapter 1 Standards 13:00-14:45,
CB-05
2 Lazear, Adverse Selection 16 January, 17 – 22 Jan
Chapter 2 13:00-14:45,
CB-05
3 Lazear, Performance Pay 23 January, 24 - 29 Jan
Chapter 10 13:00-14:45,
CB-05
4 Lazear, Education 30 January, 31 Jan - 5 Feb
Chapter 3 13:00-14:45,
CB-05
5 Lazear, Promotions 1 February, 8 Feb,
Chapter 11 13:00-14:45, 13:00-14:45,
(up to p. M1-12 M1-12 (plenair!)
276)
6 Lazear, Team Production 6 February, 7 – 12 Feb
Chapter 8 13:00-14:45,
(up to p. CB-05
190)
7 Lazear, Seniority Based Pay 13 February, 14 - 19 Feb
Chapter 11 and Benefits 13:00-14:45,
(from p. 276) CB-05
and chapter
13
8 Lazear, Nonmonetary 20 February, 20 Feb,
Chapter 15 Compensation and 13:00-14:45, 13:00-14:45,
(from p. 362) Empowerment CB-05 CB-05 (plenair!)
Opportunity to ask 22 February,
questions 15:00 – 16:45
M1-12
 Part B: Public Economics
No Literature Topic Lecture Tutorial
1 Rosen, Introduction / Public 8 January, 10 - 15 Jan
Chapters 1- 4 Goods 13:00-14:45,
and 8 CB-05
Review of Perfect 11 January,
Competition / More on 13:00-14:45,
Public Provision M1-12
2 Rosen, Externalities 15 January, 17 - 22 Jan
Chapters 5 13:00-14:45,
and 7; CB-05
Frank & Education / Common 18 January,
Cartwright, Resource Problem 13:00-14:45,
Chapt.16 / 18 M1-12
3 Rosen, Asymmetric 22 January, 24 - 29 Jan
Chapter 9 - Information 13:00-14:45,
11 CB-05
4 Rosen, Redistribution 29 January, 31 Jan - 5 Feb
Chapters 12 13:00-14:45,
and 13 CB-05
5 Rosen, Taxation: Incidence 5 February, 7 - 12 Feb
Chapters 14 and Distortions 14:00-15:45,
and 15 CB-05
6 Rosen, Optimal Taxation 12 February, 14 - 19 Feb
Chapter 16 13:00-14:45,
CB-01
7 Rosen, Collective Decision- 19 February, 21/ 22 Feb
Chapter 6 Making 13:00-14:45,
CB-01
Opportunity to ask 22 February,
questions 15:00-16:45
M1-12

Lectures
Slides and exercises (including answers) are uploaded weekly on Canvas, at most one
day before the lecture.

On Friday February 22, 15:00-16:45, M1-12, the lecture is devoted to answering your
questions. Both lecturers will be present.

Tutorials
For both parts of the course, you will get a weekly exercise set that is discussed in the
tutorial. You are supposed to seriously attempt to solve the exercises before the
tutorials. Staring at an exercise for 5 minutes is not a serious attempt!
Tutorials are not meant to passively copy solutions. In fact, you receive solutions
together with the exercise sets. The key purpose of the tutorial is to learn why an
exercise is solved in a particular way, and how that is related to the concepts and
theories discussed. The tutorial teachers are instructed to involve the students in the
discussion of the exercises.
For most of the course, the tutorials of the two parts of the course have this schedule:
• Groups IB01, IB07, the Pre-master group (PREMSC), and the re-takers (RCDV)
have public economics tutorials on Monday and personnel economics tutorials on
Thursday.
• Groups IB06, and EE02 have public economics tutorials on Monday and
personnel economics tutorials on Friday.
• Groups IB03, IB05 and MB01 have public economics tutorials on Tuesday and
personnel economics tutorials on Friday

The last tutorial (on 21-22 Feb) is on public economics for all groups.

Obligatory participation
There is no mandatory participation / presence. Presence at the lectures and tutorials is
highly recommended. In the tutorials, presence is recorded.

Midterm exams
There are two midterm exams. Both have open questions, and participating yields a
grade between 1 and 10. Each of these midterm grades counts for 10% of the final
grade. Graphical calculators are not permitted in the midterm exams.

The first midterm exam is on January 24, 18:30-19:30. This midterm exam covers the
first two weeks of lectures and tutorials (topics no. 1 and 2, see the tables on the
previous pages, topic numbers are in the first row of the tables).

The second midterm exam is on February 14, 18:30-19:30. This midterm exam covers
the first five weeks of lectures and tutorials (topics no. 1 – 6 of Personnel Economics
and no. 1 – 5 of Public Economics, see the tables on the previous pages, topic
numbers are in the first row of the tables).

It is not possible to redo the midterm exams or to reschedule them. Not participating
in a midterm implies grade 0 for that midterm.

Exam and grade determination

The exam takes place on Tuesday February 26, 13:30 – 16:30. The re-sit takes place
on Wednesday July 24, 13:30 – 16:30.
Graphical calculators are not permitted during the exam.

The exam has 40 propositions. For each proposition you have three optional answers:
(i) proposition is true, (ii) proposition is false, (iii) abstaining from answering the
question (the ‘question mark’).
The standard way of calculating exam grades is as follows. Each correctly answered
proposition yields 2 points. Abstaining from answering a question (the ‘question-
mark’ option) yields 1 point. Each incorrectly answered proposition yields 0 points.
Maximally, you can score 80 points. To take gambling into account, a score of less
than or equal to 40 points yields exam grade 1. For scores greater than 40, the exam
grade is given calculated as follows: If P is the total number of points scored on the
exam, the exam grade = 1 + [P - 40]*9/40; rounded to one decimal point.
It is possible (but very unlikely) that we deviate from the standard way of calculating
exam grades.
Your final grade is calculated as
Final_grade = 0.8*exam_grade + 0.1*grade_midterm_1 + 0.1*grade_midterm_2

The final grade after the re-sit exam is calculated in the same way. Hence, midterm
exams also count for determining the final grade after the re-sit. Re-taking the
midterms is not possible.

Comments
In the lectures, we discuss important concepts and theories, show you the practical
relevance of these theories, and work out some exercises. All exercises have an
economic interpretation, and highlight or extend the theories discussed.

Each week, you receive two exercise sets, one for each part of the course. These
exercises are discussed in the tutorials. The exercises discussed during the tutorials are
generally somewhat more difficult than those in the books. Yet, the skills necessary to
solve the exercises have been taught in Bachelor 1. The solutions to the exercises are
posted jointly with the exercises. Do not look at these solutions before you have done
a serious attempt at solving an exercise. It is crucial for this course that you spend
enough time and effort on the material, in particular the exercises.

Typically, the difficult part of an exercise is to determine how you are supposed to
find the answer. If you know this, actually doing it is not too difficult. In determining
what you are supposed to do, the theory discussed in the book and the lectures is
crucial. Make sure that you leave the tutorials understanding why exercises should be
solved as explained in the solutions.

8 ECTS divided over 8 weeks implies 28 hours of study per week for this course.
Each week, there are 6 lecture hours and 4 tutorial hours. The optimal division of the
remaining 18 hours is as follows: 1 – 2 hours looking at the material before a lecture.
After a lecture, 2 hours of studying the material. 2 hours preparation for a tutorial, and
another 1 – 2 hours of studying the exercises after the tutorial.

Questions?
We are happy to answer questions:
- during the tutorials
- after or before the lectures
- during office hours (Delfgaauw on Tuesday between 3 pm and 5 pm, room E1-34,
Dur on Mondays between 3 pm and 5 pm, room E1-10).