The Nobel Prize in Economics, 2020

It is such a pleasure to begin a blog post on such a happy, warm and fuzzy note in 2020 – and what’s rarer is that the note is courtesy Twitter!

Milgrom and Wilson aren’t exactly household names in India – or at any rate, weren’t household names until yesterday. In fact, even within economics departments, they are unlikely to have been names that absolutely everybody is familiar with. This blog post is as much a celebration of they having won the Nobel Prize for Economics as it is an opportunity for me to learn more about their work.

But let’s begin by allowing Twitter to return to type, as it were:

This is not, to be clear, any random person on Twitter. Branko Milanovic is currently a Professor at CUNY, has worked in the World Bank, and has written some rather well received books in the recent past.

So what gives? Why such a curmudgeonly response to the highest prize that one can receive as an economist?

Twitter being what it is, Branko Milanovic was eventually goaded into answering this question himself (link here), but his response – to me! – boils down to “Pah! There are other, more important problems to think about.”

Well, maybe. But if you ask me, Milgrom and Wilson’s work is plenty important in its own right.

Let’s find out why!

Every day, auctions distribute astronomical values between buyers and sellers. This year’s Laureates, Paul Milgrom and Robert Wilson, have improved auction theory and invented new auction formats, benefitting
sellers, buyers and taxpayers around the world.

https://www.nobelprize.org/uploads/2020/09/popular-economicsciencesprize2020.pdf

How do we decide who gets what? Should this be decided by governments without the use of markets, or should this be completely random? Should bidding wars (that is, auctions) be deployed, and if so, what might be the implications?

It is for their attempts at answering that last question, for the most part, that Milgrom and Wilson have been awarded this year’s Nobel Prize in Economics.

How did they go about answering this question? Here’s Timothy Taylor with one answer:

A useful starting point is to recognize that auctions can have a wide array of formats. Most people are used to the idea of an auction where an auctioneer presides over a room of people who call out bids, until no one is willing to call out a higher bid. But auctions don’t need to work in that way.

An “English auction” is one where the bids are ascending, until a highest bid is reached. A “Dutch auction”–which is commonly used to sell about 20 million fresh flowers per day–starts with a high bid and then declines, so that the first person to speak up wins. In an open-outcry auction, the bid are heard by everyone, but in a sealed-bid auction, the bids are private. Some auctions have only one round of bidding; others may eliminate some bidders after one round but proceed through multiple rounds. In “first-price” auctions, the winner pays what they bid; in “second-price” auctions, the winner instead pays whatever was bi by the runner up.

In some auctions the value of what is being bid on is mostly a “private value” to the bidders (the Nobel committee suggests thinking about bidding on dinner with a Nobel economist as an example, but you may prefer to substitute a celebrity of your choice), but in other cases, like bidding on an offshore oil lease, the value of the object is at least to some extent a “common value,” because any oil that is found will be sold at the global market price. In some auctions, the bidders may have detailed private information about what is being sold (say, in the case where a house is being sold but you are allowed to do your own inspection before bidding), while in other auctions the information about the object being auctioned may be mostly public.

In short, there is no single perfect auction. Instead, thinking about how auctions work means considering for any specific context how auction rules and format in that situation, given what determines the value of the auctioned objects and what what kind of information and uncertainty bidders might have.

https://conversableeconomist.blogspot.com/2020/10/a-nobel-prize-for-auction-theory-paul.html

Do read the rest of the blogpost for some very interesting examples of how auctions might go wrong – most of them excerpted from an excellent paper by Paul Klemperer.

The excellent, excellent blog A Fine Theorem ends up responding (unintentionally, to be clear) to Branko Milanovic while speaking about Milgrom and Wilson’s body of work:

When it comes to practical application, Milgrom’s work on auctions is well-known, and formed the basis of his Nobel citation. How did auctions become so “practical”? There is no question that the rise of applied auction theory, with the economist as designer, has its roots in the privatization wave of the 1990s that followed the end of the Cold War. Governments held valuable assets: water rights, resource tracts, spectrum that was proving important for new technologies like the cell phone. Who was to be given these assets, and at what price? Milgrom’s 1995 Churchill lectures formed the basis for a book, “Putting Auction Theory to Work”, which is now essential reading alongside Klemperer’s “Theory and Practice”, for theorists and practitioners alike. Where it is unique is in its focus on the practical details of running auctions.

https://afinetheorem.wordpress.com/2020/10/12/operations-research-and-the-rise-of-applied-game-theory-a-nobel-for-milgrom-and-wilson/

In other words, applied auction theory helps us, as a society, decide who gets what, and on what basis. Especially with the end of the Cold War, and with the wave of liberalization and privatization that followed in many major economies the world over, applied auction theory became especially important!

Timothy Taylor again:

One useful property of auctions is that in a number of settings they can discipline the public sector to make decisions based on economic values, rather than favoritism. For example, when a city wants to sign a contract with a company that will pick up the garbage from households, companies can submit bids–rather than having a city council choose the company run by someone’s favorite uncle. When the US government wants to give companies the right to drill in certain areas for offshore oil, or wishes to allocate radio spectrum for use by phone companies, it can auction off the rights rather than handing them out to whatever company has the best behind-the-scenes lobbyists. In many countries, auctions are used to privatize selling off a formerly government-owned company.

https://conversableeconomist.blogspot.com/2020/10/a-nobel-prize-for-auction-theory-paul.html

By the way, this post – or indeed the blog posts that I have referred to so far – aren’t really indicative of just how complex this field has become today! For example, take a look at this video to understand how modern auction design is the combination of cutting edge computer science, operations research and economic theory at the same time (h/t Alex Tabarrok on MR)

MR’s other blogger, Tyler Cowen’s posts on both winners are also worth reading: here is the post on Milgrom, and here is the post on Wilson. Like the post on A Fine Theorem, both posts contain much more information about both authors than just the body of work that won them the Nobel.

For example, the story of Milgrom courting his wife:

And before I forget, also read about the “no-trade” theorem and the bid-ask spread paper – not to mention the “Chain Store” paradox and the “Gang of Four” papers. Tyler Cowen’s post, and A Fine Theorem’s post have fine summaries of all of them.

In line with Tyler Cowen’s post about Milgrom, his post about Wilson contains much more information about Wilson’s work outside of auction theory. The entire post is worth bookmarking for the treasure trove of links contained therein, but in particular, the following are particularly interesting to me:

Dynamic Games with Incomplete Information, Wilson’s survey article on Electric Power Pricing, and a (mutual) interview between Alvin E. Roth and Wilson.

Speaking of Roth (himself a Nobel Prize winner, of course), here is his blogpost about the prize – as he says, 2024’s Nobel Prize is something we should keep an eye out for!

Joshua Gans, another student of Paul Milgrom, also has a blog post on the winners, with a rather neat explanation of why Milgrom’s Wikipedia page is so lengthy:

For that conference, the attendees all contributed to complete Paul’s wikipedia page. The idea was to make sure that everything was there specifically for today. I had a goal of making it the longest page of any living economist. We overshot and it is the longest page of any economist! His contributions were so voluminous, it wasn’t hard to get to that point.

https://digitopoly.org/2020/10/12/remarks-on-paul-milgrom/

There is so much to read as a consequence of having written this blogpost! Both for myself, and for anybody who might be interested, here is a (by no means comprehensive) list:

  1. Paul Milgrom’s Wikipedia page (Joshua Gans and team are nothing if not thorough!)
  2. Robert Wilson’s Wikipedia page.
  3. How Market Design Emerged from Game Theory: A Mutual Interview
  4. Economics, Organization and Management, by Milgrom and Roberts (a textbook)
  5. The Firm as an Incentive System, by Holmstrom and Milgrom
  6. Putting Auction Theory to Work, by Paul Milgrom
  7. The Nobel Prize popular science background
  8. …and the scientific background.
  9. What Really Matters in Auction Design (by Klemperer, note!)
  10. Trillion Dollar Economists, by Robert Litan (h/t Arnold Kling)
  11. And of course, everything else I have linked to already!

And finally, just to round off the whole thing, why not end with a tweet, since we started with one? Explaining stuff as simply as possible is one of my life goals, and I wish my game was half as good as this tweet:

Congratulations to both winners!

Previous Nobel Prize entries can be found here (2019: Banerjee, Duflo and Kremer) and here (2018: Romer and Nordhaus)

EC101: Links for 26th December, 2019

  1. On some articles about Baumol’s cost disease.
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  2. A topic that is very, very dear to my heart: teaching economics better, and to younger folks.
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  3. A topic on which I changed my mind this year, and therefore this year ought to count as a success. Props to Murali Neelakantan for helping me do so! On patents.
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  4. Two sets of links about this year’s Nobel. One set is rather informative
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  5. While the other is more critical.

Etc: Links for 22nd November, 2019

  1. Timothy Taylor tells us about the time when Hayek spoke about the inadvisability of the Nobel Prize in Economics… while receiving it himself. It is a speech that reads well.
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  2. “With that in mind, the journalist Oliver Morton has made the marvelous suggestion that if at least some abstemiousness is due to shyness and the inability to find partners (while the promiscuous have relatively little trouble in this regard), then the answer might be to establish a government-funded dating service: bring us a used condom and we’ll get you a date.”
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    I cannot remember how and where I chanced upon this article, but I can assure you that I thoroughly enjoyed reading it. Steven Landsburg on why more people should have sex, and how that might benefit society – but only up to a point. If you are confused and intrigues, I strongly recommend reading this article.
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  3. “Trapped in the eye of this storm, Joumban and Mae Seang press their faces against each other. With her trunk, Mae Seang gently touches Joumban’s mouth, his tusks, his eyes. He responds in kind. They wrap their trunks around each other and rub foreheads. What must they make of all this?”
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    A gratifyingly long read about elephants, including how to purchase one. By the way, what this reminded me the most of was (if I recall correctly) an MRU video about buying slaves in Africa, and the elasticity of supply. Via the consistently excellent The Browser
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  4. “Now, thanks to a new initiative by the Internet Archive, you can click the name of the book and see a two-page preview of the cited work, so long as the citation specifies a page number. You can also borrow a digital copy of the book, so long as no else has checked it out, for two weeks—much the same way you’d borrow a book from your local library. (Some groups of authors and publishers have challenged the archive’s practice of allowing users to borrow unauthorized scanned books. The Internet Archive says it seeks to widen access to books in “balanced and respectful ways.”)”
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    Wikipedia’s supply chain.
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  5. “But the work of D’Agostino and a handful of other pioneering ketone researchers over the past decade has also led scientists at Harvard, Yale, and other top institutions to consider the diet’s potential to treat other diseases. Siddhartha Mukherjee, an oncologist and the author of The Emperor of All Maladies, a Pulitzer Prize–winning history of cancer science, is among those interested in whether the ketogenic diet could have a role in cancer therapy.”
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    On the unexpected benefits of the ketogenic diet.

EC101: Links for 17th October, 2019

  1. “In order to combat global poverty, we must identify the most effective forms of action. This year’s Laureates have shown how the problem of global poverty can be tackled by breaking it down into a number of smaller – but more precise – questions at individual or group levels. They then answer each of these using a specially designed field experiment. Over just twenty years, this approach has
    completely reshaped research in the field known as development economics. This new research is now delivering a steady flow of concrete results, helping to alleviate the problems of global poverty.”
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    A simple primer on the work that Duflo, Benerjee and Kremer have won the Nobel Prize for.
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  2. “The first general comment is the idea of randomisation is hardly anything new for researchers who have studied or followed Indian development. The Planning Commission started something called Programme Evaluation Studies way back in 1954 which more or less studied the same thing. Agriculturists — both practitioners and researchers — have also used similar techniques of RCT to see what agricultural intervention worked.In my own research on banking history, I saw how Syndicate Bank started programmes on agricultural and rural development based on near similar ideas of randomisation. To be fair, the 2019 laureates have advanced these ideas using techniques from sampling, statistics, and econometrics to draw finer inferences.”
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    Amol Agarwal over at Moneycontrol points out a more nuanced understanding of both this year’s Nobel Prize as well as the Nobel Prize for Economics in general. Well worth reading!
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  3. The NYT profile on this year’s Nobel Prize.
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  4. “The significance of what Angrist and Pischke termed the “credibility revolution in empirical economics” can be seen in the John Bates Clark Medal awards given to researchers who participated in that revolution. Between 1995 and 2015, of the fourteen Clark Medal winners, by my estimate at least seven (Card, Levitt, Duflo, Finkelstein, Chetty, Gentzkow, and Fryer) are known for their empirical work using research designs intended to avoid the problems that Leamer highlighted with the multiple-regression approach.”
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    Mostly for those truly interested in economics, but Arnold Kling points out how more people should know about Ed Leamer.
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  5. Heavily, heavily recommended: this is the longer version of the first link above, again by the Nobel Prize committee itself.

The Nobel Prize in Economics, 2019

Abhijit Banerjee, Esther Duflo and Michael Kremer have won the Nobel Prize in Economics for the year 2019.

Does Giving Aid Work?

When I teach classes in development economics, I often speak about the Easterly-Sachs spectrum*. Without getting into long, boring details, here is the point: William Easterly is of the opinion that giving aid does more harm than good. At the other end of the spectrum is Team Sachs: no way are countries ever going to develop without aid.

Now you, I and everybody else we know may have an opinion about this spectrum, and we could spend the rest of our lives arguing about our opinions. But if the issue is ever to have a chance of being settled, we need evidence, one way or the other.

Where to get that evidence from? How?

This year’s Nobel Prize has been awarded to the three people listed above for their attempt(s) at answering these questions.

The issue is impossibly difficult to deal with. Say you give aid to a country, and say the country does well next year. How much of the improvement was because of your aid? How much of the improvement would have taken place any way? Might it be the case that the improvement would have been (horror!) even more had you not given the aid? What if you gave aid to improve, say, primary healthcare for youngsters, and educational outcomes improved. Did kids learn better because of the aid given for healthcare? And on and on, making the issue all but impossible to resolve.

Nobel Prizes ought to be given for making all but impossible to resolve issues tractable, and from that viewpoint, this is an excellent choice.

The way the Nobel Prize winners sought to resolve this issue was by setting up experiments. Or, to use the jargon du jour, by setting up Randomized Control Trials. Or Impact Evaluations, if you will.

What are RCT’s?

Malaria is a frustrating disease to think about, because one the simplest ways to deal with it is to prevent it. And prevention is, for the most part, simply caused most effectively by using mosquito nets. And so an NGO called TAMTAM started distributing mosquito nets in Kenya.

Would people buy the nets if they weren’t subsidized? What if they were partially subsidized? What if they were free? This example is drawn from Poor Economics, but the idea is very simple (to describe, at any rate!): find out what works by experimenting.

Whichever method works best, well, deploy it.

Banerjee, Duflo and Kremer have all run a series of experiments on a variety of issues to figure out precisely this: which method is working best? Set up, as carefully as possible, an experiment to find out what works, and to what extent. Read Alex Tabarrok’s post over on Marginal Revolution to get a sense of some of the experiments that have been carried out.

There have been experiments carried out on gender, on mosquito nets, on savings behavior: the works. If you are curious about what kind of experiments have been carried out, this is a useful website.

So, awesome! Right? Well…

A long(ish) video, but here’s one of the dissenting voices.

 

But still…

All of the above being said, RCT’s have been fairly interesting in terms of helping us understand how a specific part of the world works for a specific period of time.

More than that is difficult to say, but that doesn’t mean at least that much shouldn’t be said!

Additional Links

  1. A book about randomized control trials.
  2. The latest book by Duflo and Banerjee (not out yet!)
  3. The Twitter thread announcing the news, from the official Nobel Prize Twitter handle.
  4. Via Niranjan Rajadhakshya’s Twitter feed, an old profile he had done of Banerjee and Duflo.
  5. Here is an old talk given by Michael Kremer on RCT’s.

Thursday’s links, needless to say, will be other posts written about this years prize winners.

The Bottom Line

Work done by Banerjee, Duflo and Kremer has helped us uncover some surprising truths, changed our guesses about what would happen to y if x was done, and we have come along much more in terms of the science of setting up credible, well designed, carefully constructed experiments. Whether or not you agree with their current popularity, they have aided our understanding of the world we live in, and that ought to be celebrated.

Congratulations!

 

 

 

 

 

 

*Duflo and Banerjee speak about this at the very start of their excellent book, Poor Economics, which is where I got the idea from, of course.