Tag: GPEFM

Sectoral risk-weights and macroprudential policy

Publication in Journal of Banking and Finance by Alex Hodbod (ITFD ’12) and Steffi Huber (Economics ’10, GPEFM ’17)

We have a forthcoming article “Sectoral Risk Weights and Macroprudential Policy” in the Journal of Banking & Finance with our co-author Konstantin Vasilev (Essex).

The authors!

Paper abstract

This paper analyses bank capital requirements in a general equilibrium model by evaluating the implications of different designs of such requirements regarding their impact on the tendency of banks to amplify the business cycle.

figure
Interest rate spreads structure. This figure gives an overview of the different interest rate spreads within the model and the factors that affect them. The asset-specific interest rate spreads determine the borrowing costs of households and firms and hence the quantities of specific loan types in the economy.

We compare the Basel-established Internal Ratings-Based (IRB) approach to risk-weighting assets with an alternative macroprudential approach which sets risk-weights in response to sectoral measures of leverage. The different methods are compared in a crisis scenario, where the crisis originates from the housing market that affects the banking sector and is then transmitted to the wider economy.

figure
Variance decomposition – real consumption during the Great Recession. This variance decomposition shows that the model identifies the productivity shock and the shock to mortgage lending risk to be the main drivers of the crash in real consumption during the Great Recession. In our model, the main channel through which the shock to mortgage risk has a procyclical effect on consumption is through lending and house prices.

We investigate both boom and bust phases of the crisis by simulating an unrealized news shock that leads to a gradual build-up and rapid crash in the economy. Our results suggest that the IRB approach creates procyclicality in regulatory capital requirements and thereby works to amplify both boom and bust phases of the financial cycle. On the other hand, our proposed macroprudential approach to setting risk-weights leads to counter-cyclicality in regulatory capital requirements and thereby attenuates the financial cycle.

figure
Impulse Response Function – Unrealised news shock. Here, we model both the build-up and crash phases of the crisis and use this to examine how different policy approaches perform in handling the boom phase of the cycle. In periods 1-4 agents start with expectations that a housing boom will occur, but at period 4 a shock arrives as this boom does not materialise. At the top of the chart one sees that the policy setup based on the IRB approach (red) generates the biggest macroeconomic consequences from this shock; it is the most procyclical. The macroprudential approach to risk-weighting (in green) is the least procyclical. An unweighted “leverage ratio” approach (blue) is less procyclical than the IRB approach, but more so than our macroprudential approach.

Conclusions in brief

  • We show that IRB risk-weights can induce procyclicality of capital requirements and amplify both boom and bust phases of the business cycle. This is particularly concerning because procyclical risk weights could undermine other macroprudential tools, as these other tools are themselves based on risk-based measures of capital requirements e.g. Counter Cyclical Capital Buffers.
  • Our alternative approach of macroprudential risk weights could induce countercyclicality of capital requirements, which may offer benefits in terms of smoothening financial cycles. Targeting macroprudential intervention on bank risk-weights is likely to be more effective when it is sector-specific. This will alter banks’ incentives in a sensitive way – thereby tending to attenuate sectoral asset booms.
  • The results complement the ongoing debate about the potential merits of a Sectoral Counter Cyclical Capital Buffer, which is ongoing internationally.

About the authors

portrait

Alexander Hodbod ’12 is Adviser to representatives on the ECB Supervisory Board. He is an alum of the Barcelona GSE Master’s in International Trade, Finance and Development.

LinkedIn | Twitter

portrait

Stefanie J. Huber ’10 is Assistant Professor at the University of Amsterdam. She is an alum of the Barcelona GSE Master’s in Economics and GPEFM PhD Program (UPF and Barcelona GSE).

LinkedIn | Website

If you are an alum and would like to share your work on the Barcelona GSE Voice, please reach out!

How to submit your work to the Voice

Uncertainty in learning, choice and visual fixation

Paper by Hrvoje Stojić (Economics ’11, GPEFM ’17)

source: Stojić et al

Hrvoje Stojić (Economics ’11 and GPEFM ’17) is co-author on a new paper, “Uncertainty in learning, choice and visual fixation,” now available in pre-print on PsyArXiv.

The authors on the paper illustrate the interdisciplinary nature of this research. Hrvoje and co-author Raymond Dolan are researchers at the Max Planck UCL Centre for Computational Psychiatry and Ageing Research; Jacob Orquin of Aarhus University specializes in the role of eye movements in decision making; Peter Dayan is at the Max Planck Institute for Biological Cybernetics), and Maarten Speekenbrink is affiliated with the UCL Department of Experimental Psychology.

About the paper

Hrvoje shares an overview of the paper in this Twitter thread:

Twitter thread
View thread on Twitter

Get the pre-print

The paper can be downloaded from PsyArXiv.

alumni

Hrvoje Stojić (Economics ’11, GPEFM ’17) is a researcher at UCL. He is an alum of the Barcelona GSE Master’s in Economics and PhD from GPEFM (UPF and Barcelona GSE).

LinkedIn | Twitter | Github

Women in Economics seminar

Master’s students Analía García ’19 (ITFD) and Lorena Franco ’19 (Economics) organized the seminar to highlight research by female PhD students and professors

Women in Economics seminar

This May, BGSE Master’s students Analía García ’19 (ITFD) and Lorena Franco ’19 (Economics) organized the Women in Economics two-day seminar, which meant to highlight female PhD students and faculty members’ research.

Three students and four Barcelona GSE Affiliated Professors presented their work, which varied from family economics to political economics and experimental economics. More information of the speakers and their topics below.

Organizers Analía García ’19 and Lorena Franco ’19

These efforts, nonetheless, started over two months ago when both students, who are from Latin America and the Caribbean, organized an open forum on International Women’s Day. Having prior work experience and noting the clear lack of female representation in economics and academia, they wanted to expand the conversations on the topic and discuss what we could do to potentially “make it better” within their parameters. The Women in Economics seminar was born from the conversations during the first and second open forums, and thanks to the ideas of Marta Morazzoni and Claudia Meza, both PhD students at GPEFM (UPF and Barcelona GSE).

Putting this together was a challenge given this had not been done at BGSE before, but the organizers hope this was insightful for all those who attended.

More female and racial diversity in economics and academia, please!

The speakers and the titles of the work were the following (listed alphabetically):

PhD Students

  • Marta Morazzoni “Family Dynamics in Macroeconomics: when the representative household does not represent us anymore”
  • Marta Santamaría “The Gains from Reshaping Infrastructure: Evidence from the Division of Germany”
  • Alina Velias “When to Tie Odysseus to the Mast: Costly Commitment Under Biased Expactations”

Professors

  • Enriqueta Aragonés “Stability of a Multi-level Government: A Catalonia in Spain”
  • Rosa Ferrer “Consumers’ Costly Responses to Product-Harm Crises” and “Gender Gaps in Performance: Evidence from Young Lawyers”
  • Ada Ferrer-i-Carbonell “Relative Deprivation in Tanzania”
  • Rosemarie Nagel “Regularities in the Lab, Brain, and Field: A Cognitive Reasoning Model”
View all seminar photos on Flickr

Asymmetric Social Distance Effects in the Ultimatum Game

Publication by Orestis Vravosinos ’18 (Economics) with Kyriakos Konstantinou

The Ultimatum Game Comic
Comic author: Zach Weinersmith

A paper by Orestis Vravosinos (Economics ’18, UPF MRes in Economics ’19) and Kyriakos Konstantinou (LSE) has just been published in the Review of Behavioral Economics. Below is an overview of the paper.

The Ultimatum Game

Given that in experiments ultimatum game outcomes are often significantly different from Nash equilibrium predictions under standard assumptions on preferences, many studies have examined the impact of fairness on players’ considerations and how the effect of the sense of fairness on players’ actions may vary, while other factors change. It has been argued that increased stakes (larger sum of money distributed) can reduce sensitivity to fairness of player 2 making it more likely that she accepts lower shares of the total sum, thus, giving player 1 the opportunity to offer a lower share.

Social Distance

Social distance has also been found to affect fairness. In the existing literature, social distance commonly varies only from players being close relatives or friends to complete strangers, even though negatively-valenced relationships can be important from an economic point of view. Our study aims to fill this gap by introducing negatively-valenced relationships between the players. We argue that altruistic and empathetic behavior of the proposer towards the responder may not vary (increase) as significantly in the region of negative relationships compared to the region of positive relationships. Similarly, social distance effects stemming from reciprocity may vary less in the region of negative relationships. Thus, we hypothesize that in the ultimatum game social distance effects are asymmetric with their magnitude varying more in the spectrum of positively compared to negatively-valenced relationships.

Our experimental results support this hypothesis; in the region of positively-valenced relationships, the proposers increase the percentage they offer as relationship quality increases more drastically compared to when the relationship is negatively-valenced, in which case they appear more invariant to relationship effects. Also, by eliciting a minimum share which the responder is willing to accept out of the total sum, we provide clearer results on the social distance and stakes effects on the latter’s behavior. Last, we find a negative effect of relationship quality on the minimum acceptable share. This contradicts a strand of the literature which suggests that closer-“in-group” individuals may be punished more severely, so that cooperation in a group is maintained.

References

Orestis Vravosinos and Kyriakos Konstantinou (2019), “Asymmetric Social Distance Effects in the Ultimatum Game”, Review of Behavioral Economics: Vol. 6: No. 2, pp 159-192.

Orestis Vravosinos

Orestis Vravosinos ’18 is an MRes student at GPEFM (UPF and Barcelona GSE). He is an alum of the Barcelona GSE Master’s in Economics.

LinkedIn | Website

Unlucky Cohorts: Estimating the Long-Term Effects of Entering the Labor Market in a Recession in Large Cross-Sectional Data Sets

A new publication by Hannes Schwandt (GPEFM ’12) in the Journal of Labor Economics

Hannes Schwandt (GPEFM ’12) is Assistant Professor of Economics at Northwestern University’s School of Education and Social Policy, currently visiting Stanford University’s Institute for Economic Policy Research (SIEPR). His paper, “Unlucky Cohorts: Estimating the Long-term Effects of Entering the Labor Market in a Recession in Large Cross-sectional Data Sets” (with Till von Wachter) has just been published in the January 2019 issue of the Journal of Labor Economics. The paper has garnered attention from major media outlets including The Economist and The Financial Times.

Abstract

This paper studies the differential persistent effects of initial economic conditions for labor market entrants in the United States from 1976 to 2015 by education, gender, and race using labor force survey data. We find persistent earnings and wage reductions, especially for less advantaged entrants, that increases in government support only partly offset. We confirm that the results are unaffected by selective migration and labor market entry by also using a double-weighted average unemployment rate at labor market entry for each birth cohort and state-of-birth cell based on average state migration rates and average cohort education rates from census data.

Media attention

See how media outlets covered this paper (subscription may be required):

Mothers’ Care: Reversing Early Childhood Health Shocks through Parental Investments

Working paper co-authored by Barcelona GSE alum Cristina Bellés-Obrero (Economics ’12, GPEFM ’17)

Barcelona GSE alum Cristina Bellés-Obrero (Economics ’12, GPEFM ’17) has co-authored a new working paper with Antonio Cabrales (UCL), Sergi Jiménez-Martín (UPF and Barcelona GSE) and Judit Vall-Castello (CRES-UPF) on “Mothers’ Care: Reversing Early Childhood Health Shocks through Parental Investments.”

Cristina shares a summary of the paper and some notes about the writing process:

The paper

Health shocks at birth are important in and of themselves. But they also have an impact on outcomes later in life, such as education, productivity or adult health.  There is a large literature showing that health shocks at birth lead to important negative outcomes later on.  For instance, children born with low birth weight have a higher probability of having adverse health and developmental outcomes in the medium run (Johnson and Schoemi (2011a,b), Case et al. (2005)).  However, there is much less research on the potential factors that can compensate those early life shocks. This represents an important element with strong implications for policy makers. 

In this paper, jointly with Antonio Cabrales, Sergi Jimenez and Judit Vall, we identify one of these factors.  In particular, we want to answer the following question: Are educated parents able to reverse a negative health shock that their children experience at birth?

To answer this question we study the causal effect of a child labor regulation on the short and long-term health of the affected individuals’ descendants. In 1980 a child labor reform took place in Spain, which increased the minimum legal age to work from 14 to 16 years old. A previous paper shows that this reform increased the education of both women and men. At the same time, the reform decreased the fertility and marriage rates of individuals affected, and importantly, it was detrimental for their male children’s health at delivery. At birth, male babies from more educated mothers have worse perinatal health outcomes, such as lower birth weight or low maturity. We estimated that the reform caused 618 more births at less than 37 weeks of gestation, 837 more first multiple births, and 768 extra births with low birth weight. On the other hand, we do not find the same negative impact of the reform over female babies. 

Given the size of the effects that we find on birth outcomes and the established links between health at birth and long-term health, we would expect that the deterioration of infant health at birth would persist in the medium and long term unless there is a compensation mechanism. Yet, in the medium run, we find that the effects of the reform on objective health outcomes are insignificant for both males and females. Thus, we can conclude that educated parents can reverse negative shocks at birth.

Our data suggest that the long term reversal is achieved through maternal vigilance. The male children of treated mothers with higher education are perceived as having worse health even at older ages. Their objective health status is, however, indistinguishable from that of other boys. This suggests more concerned mothers. These boys are also more likely to have private health insurance. This latter trait is significant. In Spain private health insurance is purchased in addition to the universal public health coverage. This double coverage allows beneficiaries to avoid the system gatekeeper and, hence, to have quicker access to specialists and additional tests and checkups. 

The process

We started this paper in 2017 as a follow-up project. In a previous paper, Elena Del Rey, Sergi Jimenez and Judit Vall analyze the effects of the child labor reform over education and labor market outcomes. They find that the reform increased the educational attainment of both men and women affected by the regulation. In particular, they find that the reform reduced the number of early school leavers (individuals not finishing compulsory education) by 7.6% in the case of men, and by 11% in the case of women. They also find a positive effect in the probability of attaining post-compulsory education. The reform decreased the number of individuals that do not attain any level of post-compulsory education by 3.3% for men and 2.7% for women.. 

In a different paper, we show that the reform decreased marriage and fertility rates for affected women. At the same time, we also find evidence that the reform is detrimental for the health of the offspring at the moment of delivery. We document three channels contributing to this detrimental effect: the postponement in age of delivery, the increase in single mothers, and the increase in the likelihood that those women engage in unhealthy behaviors such as smoking.

Thus, the reform had a positive effect on the parents, that are now more educated, but a detrimental effect on their children’s health at the moment of delivery. This reform, then, constitute a perfect setting to analyze parent’s education as a possible factor that will allow the reversal of negative health shocks at birth. 

Find this paper in the BGSE working paper series

Feedback rating to decrease bribery: Evidence from the Kyrgyz Republic

Research by Francesco Amodio ’10 (Economics) and co-authors at The World Bank and Barcelona GSE

Francesco Amodio ’10 (Economics) co-authored this article for VoxDev with Barcelona GSE Research Professor Giacomo De Giorgi along with World Bank economists Jieun Choi and Aminur Rahman. In the article, the team gives an overview of a field experiment they conducted and theoretical model they developed that describes the interaction between firms and inspectors.

“In collaboration with the World Bank Group and the State Tax Service of the Kyrgyz Republic, we designed an incentive scheme for tax inspectors that rewards them based on the anonymous evaluation submitted by inspected firms. In theory, this should increase the bargaining power of firms in their relationship with tax officials, and decrease the bribe size. However, if firms pay bribes instead of taxes, bribes can increase on the extensive margin, and tax revenues could decrease.”

They found that anonymous rating of inspectors can decrease bribes and increase tax revenues as long as it takes into account market structure considerations.

Read the full article and find links to the research on VoxDev

Francesco Amodio is a graduate of the Barcelona GSE Master’s Program in Economics and the GPEFM PhD Program (UPF and Barcelona GSE). He is currently Assistant Professor of Economics at McGill University in Montreal, Canada. Follow him on Twitter or visit his website

The causal impact of cesarean sections on neonatal health

Post by Ana Costa Ramón ’14 and Ana Rodríguez-González ’14 (Economics Program). Both are PhD candidates of GPEFM (UPF and Barcelona GSE).

Update 17.07.2019: The authors received the second place Student Paper Prize for this research at the International Health Economics Association (iHEA) 2019 Congress in Basel, Switzerland!

Update 29.01.2019: This research has been nominated for the “Vanguardia de la Ciencia” awards promoted by La Vanguardia newspaper and the Catalunya-La Pedrera Foundation!

In recent decades there has been an increasing concern about the rise of cesarean section births. Among OECD countries in 2013, on average more than 1 out of 4 births involved a c-section (OECD, 2013), being one of the most commonly performed surgeries. Cesarean sections, performed when needed and under standard quality measures, save lives. However, unnecessary c-sections not only impose significant costs for the health system but can also negatively impact infant health.  Previous literature has found cesarean sections to be associated with several adverse health outcomes for the newborn (Grivell & Dodd, 2011) and with worse later infant health(Keag, Norman, & Stock, 2018). However, most of the studies that came to these conclusions compared mothers who gave birth vaginally with those that had a cesarean section, and this may produce biased results: mothers who give birth by c-section are likely to have different characteristics from those who have vaginal births, and this may influence the health outcomes of the child and the mother after delivery.

In a recent paper, published in the Journal of Health Economics (Costa-Ramón, Rodríguez-González, Serra-Burriel, & Campillo-Artero, 2018), we contribute to fill this gap by providing causal evidence of the impact of avoidable cesarean birth on neonatal health. To do so, we exploit variation in the probability of having a c-section that is unrelated to maternal characteristics: variation by time of day.

In particular, using data from four public hospitals in Spain, we first document that the probability of having an unplanned c-section is higher in the early hours of the night (from 11 pm to 4 am) and that this is not driven by different characteristics of mothers giving birth during these times. Figure 1 shows the c-section rate at different times of day in our sample. We can observe that the distribution of unscheduled c-sections by time of birth is not uniform. Births that take place between 11 pm and 4 am are around 6 percentage points more likely to be by cesarean.

Csections

Notes: The figure represents the proportion of unplanned c-sections by time of day over the sample of unplanned c-sections and vaginal births. Sample is restricted to single births, unscheduled c-sections and vaginal births (excluding breech vaginal babies).

We argue that, given the medical shift structure in public hospitals and the larger time-cost of surveillance implied by vaginal deliveries, doctors’ incentives to perform c-sections in ambiguous cases may be higher during these times. In fact, we are not the first to document peaks in the unplanned c-section rate during the early night. Previous studies interpret this variation as evidence that convenience and doctors’ demand for leisure influence timing and mode of delivery (Brown, 1996; Fraser et al., 1987; Hueston, McClaflin, & Claire, 1996; Spetz, Smith, & Ennis, 2001).

We take advantage of this exogenous variation and use time of day as an instrument for the probability of having an unplanned c-section. This allows us to compare mothers that give birth in the same hospital and have similar observable characteristics, differing only in the time of delivery. Our results suggest that these non-medically indicated c-sections lead to a significant worsening of Apgar scores of approximately one standard deviation, but we do not find effects on more extreme outcomes such as needing reanimation, being admitted to the ICU or on neonatal death. This is an important finding, given that previous studies in the medical literature documented an association between c-sections and an increased risk of serious respiratory morbidity and subsequent admission to neonatal ICU (Grivell & Dodd, 2011). Their findings are consistent with the results of our OLS estimation, suggesting that former analysis might have been capturing the underlying health status of newborns who need a medically necessary cesarean.

A few words on the publication process and media coverage

Given that it was a health-oriented paper, we decided to target a top field journal in health economics. We were very lucky and all the publication process went very fast and smoothly.  We had to revise the paper once and get additional data in order to be able to address some of the reviewers’ comments.

When it was published, with the help of UPF’s communication unit we sent a press release and our paper got attention from the Spanish media.  We knew that it was a controversial topic (especially from the doctors’ perspective) so we chose our words carefully, but still we got some slightly sensationalist headlines.  We learnt the lesson: you have to choose a catchy punchline yourself, or they will pick their own (and you won’t always like it).

Overall, it has been an intense and fruitful experience!

References:

Brown, H. S. (1996). Physician demand for leisure: Implications for cesarean section rates. Journal of Health Economics, 15(2), 233–242. https://doi.org/10.1016/0167-6296(95)00039-9

Costa-Ramón, A. M., Rodríguez-González, A., Serra-Burriel, M., & Campillo-Artero, C. (2018). It’s about time: Cesarean sections and neonatal health. Journal of Health Economics, 59. https://doi.org/10.1016/j.jhealeco.2018.03.004

Fraser, W., Usher, R. H., McLean, F. H., Bossenberry, C., Thomson, M. E., Kramer, M. S., … Power, H. (1987). Temporal variation in rates of cesarean section for dystocia: Does “convenience” play a role? American Journal of Obstetrics and Gynecology, 156(2), 300–304. https://doi.org/http://dx.doi.org/10.1016/0002-9378(87)90272-9

Grivell, R. M., & Dodd, J. M. (2011). Short- and long-term outcomes of cesarean section. Expert Review of Obsetrics and Gynecology, 6(2), 205–216.

Hueston, W. J., McClaflin, R. R., & Claire, E. (1996). {V}ariations in cesarean delivery for fetal distress. The Journal of Family Practice, 43(5), 461–467.

Keag, O. E., Norman, J. E., & Stock, S. J. (2018). Long-term risks and benefits associated with cesarean delivery for mother, baby, and subsequent pregnancies: Systematic review and meta-analysis. PLoS Medicine, 15(1), 1–22. https://doi.org/10.1371/journal.pmed.1002494

OECD. (2013). Health at a Glance 2013: OECD Indicators. Paris: OECD Publishing.

Spetz, J., Smith, M. W., & Ennis, S. F. (2001). Physician Incentives and the Timing of Cesarean Sections: Evidence from California Physician Incentives and the Timing of Cesarean Sections Evidence From California. Source: Medical Care MEDICAL CARE, 39(6), 536–550. https://doi.org/10.1097/00005650-200106000-00003

The Implications of Declining Firm-Level Uncertainty for Consumption Variety and Cities (Unicredit & Universities Job Market Best Paper Award)

alumni

Editor’s note: In this post, Federica Daniele (Economics ’13 and PhD candidate at UPF-GPEFM) shares a summary of her paper, “The Implications of Declining Firm-Level Uncertainty for Consumption Variety and Cities,” which has won the 2017 UniCredit & Universities Economics Job Market Best Paper Award. She also offers some advice to aspiring PhD students in the Barcelona GSE Master’s programs.

Paper summary

There is something alarming about the direction in which firm dynamics have been changing over the course of the last decades. Today it’s much rarer to encounter firms that undergo large up/downsizings than it used to be in the past: in other words, firms have become more tied to their rank in the firm size distribution. This has been of concern for many economists, who see this happening jointly with a slowdown in aggregate productivity growth and competitiveness. Being aware that the question on the drivers behind this trend and its consequences was still open to debate, coupled with an interest for entrepreneurship, is what pushed me to dive into this topic to better our understanding of the issue in my paper, “The Implications of Declining Firm-Level Uncertainty for Consumption Variety and Cities.”

An explanation for the decline in business dynamism consistent with the data is that technological change has caused the degree of idiosyncratic uncertainty that firms routinely face about their chances to grow to go down. This implies that today most of the return from starting a firm is determined by its initial (in)success as opposed to luck in the development of the business over its life-cycle. Based on evidence drawn from data on the universe of German establishments, in the paper I argue that a reduction in firm-level uncertainty is consistent with lower incentives for potential entrepreneurs to start a new business. My paper offers a new insight into the literature on the role of uncertainty for economic activity: some degree of uncertainty is beneficial, because – by unlocking the opportunity for a given firm to grow large out of fortuitous events (such as a favourable demand turn) – it encourages entrepreneurship. In this sense, my paper provides a defence of the classical argument by Frank Knight according to which risk-taking is a characterising feature of entrepreneurship.

A deficit in the growth rate of the stock of establishments triggered by a decline in firm-level uncertainty is cause of concern for multiple reasons. In my paper, I investigate the importance of two dimensions: first of all, the fact that consumers get to consume a less wide variety of goods than otherwise; and secondly, the fact that, being the loss in entrepreneurship larger in big cities, fewer consumers find appealing to move to large cities than otherwise, thus diminishing the extent of positive spillovers due to higher urban density. Another outcome of interest would have been, for example, the process of innovation within an industry.

All in all, the contribution of this paper consists of assessing both empirically and theoretically novel long-run consequences on economic activity of declining firm-level uncertainty.

Advice for future PhD students

I think Barcelona GSE masters students who are considering going the PhD / academic career route should be strategic. There is no harm in taking one year to do some exploratory work, working as RA, for example, for some good professor, if that buys the time to figure out what kind of research best matches your interests, in which institution you would feel better fulfilled, or whether academia suits you at all.

In the end, if you choose to pursue the academic route, you will have most certainly achieved a better match with the institution/supervisor, and spared a lot of time later on during the course of the PhD, which you can instead dedicate to producing research of good quality.

But even if you decide that academia is not for you, the value of the investment will still be positive, as experimenting early during one’s working career is much less costly than doing it later.

Five lessons from a one-week meeting with 18 Nobel Laureates

By Fernando Fernández (Economics ’13, GPEFM)

Photo credit: Lindau Nobel Laureate Meeting

By Fernando Fernández (Economics ’13, GPEFM) [1]

“Just when we thought we had all the answers, all the questions changed.” Mario Benedetti

That was my reaction when the 6th Lindau Meeting in Economic Sciences concluded. This meeting occurs every two years and gathers several Nobel Laureates and young economists (graduate students and assistant professors) from around the world. This meeting is certainly the most inspiring academic event I have ever attended.

The meeting took place in the beautiful town of Lindau, next to Lake Constance, in southern Germany between August 22nd and August 27th. During these days, we attended lectures from 18 Nobel laureates in Economics on a wide range of topics: bounded rationality, investment management, pension design, monetary policy, labor markets, morality and markets, political systems, innovation, and econometrics. I will not attempt to summarize these great lectures but all of them were recorded and are available on this link.

 

I would rather focus these lines on the interactions that occurred outside the “classroom”. Every day the program included lectures, lunch, seminar presentation panel discussions, and dinner.

The first lecture was given by Daniel McFadden [2], and besides the content, something really caught my attention. In the first row of the room (it was actually a theater) you could see the other Nobel Laureates. All were carefully listening to the speaker! They seemed like young students paying attention to an important professor. So the first lesson from this meeting was that we, as researchers, should actively embrace our academic curiosity.

Over lunch, I had the first opportunity to talk to a Nobel Laureate. I was sitting with some friends I just met and were talking about each others’ research. At some point, Bengt Holmstrom asked: “Would you mind if I join you?” We welcomed him, and seconds later he started asking us about our research interests. He soon realized that all of us were doing empirical work and said: “I am the only theorist in this table!”

He listened to all of us, asked some questions (some of them were hard to answer) and even gave us some advice. I was able to confirm that these brilliant economists have a special talent to listen to others, even if they are PhD students struggling with their papers. He was very generous with his time and recommended us to work hard but only on topics that we really cared about. He also advised us not to focus on publishing papers but instead on gaining respect from our peers through our work.

Hours later, I had the chance to sit on the table with Eric Maskin for dinner. He told us about the day he received the call from Stockholm and found out he won the Nobel prize. Then, we talked about US politics, big data, increasing co-authorship in economic journals, and other current issues in academia. As you can imagine, when you are sitting next to a Nobel Laureate you get the feeling that you can ask him any question. Well, these questions (some of them unrelated to economics) arrived and Maskin, very modestly, said : “I know very little about this particular topic, so I cannot have an informed opinion. In fact, you should know that one wins the Nobel prize, not because you know everything, but because you specialize in certain specific topics”. His reaction really impressed me but he was right. He could not be an expert in every topic and he acknowledged it. How many times do we feel the need to have an opinion on everything? The second lesson from this meeting is that we must always acknowledge our limitations and be humble enough to don’t give uninformed opinions.

One of the big questions most PhD students have is the following: where do great ideas come from? Tirole, Hart and Holmstrom provided some light on this issue and their advice was the third lesson. Tirole said two great sources of ideas were talking to people around you (his office was next to Hart’s) and to people outside the academia (practitioners, policy makers and business men). He encouraged us to talk to practitioners because they are facing the real problems we must address, that they have many important questions that remained unanswered and deserve our attention. Holmstrom said that the idea of his well-known model of career concerns (one of the reasons he was awarded with the Nobel prize) came when he has working in a plant in Finland, and had some problems with his manager. He then went to do his PhD and wrote a model to explain the behavior of this manager. In addition, he recommended us to become experts in the literature of our field of interest, not to follow it but to depart from it. After this, Hart said that working with Holmstrom and Tirole was a great way to find ideas. He also suggested us that when doing theoretical work, we should keep models as simple as possible.

James Heckman’s lecture was about the identification problem in econometrics. He was the most enthusiastic person I have ever seen giving an econometrics lecture. And this enthusiasm was quite contagious. Even though he was talking about highly technical and complex conditions for a new interpretation of Instrumental Variable (IV) estimates, I was surprisingly able to follow his lecture and understand the contribution he was making. Or, at least that’s the impression I had. That same day, we had a Bavarian dinner at night, with traditional music, food, and of course, beer. This was the last night of the event and the time to say good-bye to other fellow economists.

The coolest table at the Bavarian dinner

After some drinks, I decided to walk back to my hotel, located around 50-minutes away from the place we had dinner. On my way, I ran into Heckman, who seemed a bit confused. He had been walking with other young economists and then he was not sure where to go. I approached him and we realized we had to walk in the same direction. This was quite a unique and unexpected opportunity to talk about his lecture. So I started with my questions and he replied to all of them with great patience and enthusiasm. I could confirmed I had actually understood his lecture. Then, we started talking about the rapid increase in data availability and how big data should influence econometrics. He also told me good stories about his last trip to Barcelona and Peru. Eventually, we arrived at the hotel and said good-bye. This great conversation was the fourth lesson: we should remain enthusiastic even after years of dealing (doing research or teaching) with the same subject.

The fifth lesson is that these people seem very happy doing their jobs. Yes, I know, they are Nobel Laureates, they have already accomplished important professional goals. But it is still surprising how much they enjoy doing research. During lunch time or dinner, when we were able to talk to them more informally, people would usually ask: Which are the questions we should tackle? What fields are relevant now? Most Nobel Laureates seemed to share the view that the relevant questions are the ones you really care about. And if they actually work according to this view, it is not that hard to understand why they look like if they were having fun all the time.

When I was heading to this meeting, I had a lot of questions in my mind and thought the meeting would be an ideal place to get answers. During the meeting, some of my questions were being answered but later I realized that getting answers was not so important. Once the meeting was over, I realized all the lessons I took from it were unexpected. I had misunderstood the purpose of this meeting. I should have not come to the meeting looking for answers. I should have come looking for questions. These highly talented economists are Nobel Laureates precisely because they are extremely good at raising questions. Questions that open new streams of work. Questions that people had overlooked but that deserve careful thinking and attention. Now, two months after the meeting, I realize that all the questions raised by these Nobel Laureates are the reason why this event was so inspiring. Because in research that’s what keeps us working: Questions!

[1] I am thankful to the Marie Sklodowska-Curie Fellowship (through the PODER network) for sponsoring my participation in the meeting.

[2] Before McFadden’s lecture, there was a keynote address by Mario Draghi, president of the European Central Bank.