Will widely available and effective tests for COVID-19 awaken the economy from its COVID induced coma? Paul Romer, for one, thinks so. But what will each person do with the information gleaned from the test? Should we expect someone who has tested positive for the virus to stay home and someone who has tested negative to go to work? If the first receives no compensation for staying home, she will leave for work. The second, anticipating that infected individuals have an incentive to go to work, will choose to stay home. As a result, the fraction of the population out and about will have an infection rate exceeding that in the population at large.

In a new paper by Rahul Deb, Mallesh Pai, Akhil Vohra and myself we argue that widespread testing alone will not solve this problem. Testing in concert with subsidies will. We propose a model in which both testing and transfers are targeted. We use it to jointly determine where agents should be tested and how they should be incentivized. The idea is straightforward. In the absence of widespread testing to distinguish between those who are infected and those who are not, we must rely on individuals to sort themselves. They are in the best position to determine the likelihood they are infected (e.g. based on private information about exposures, how rigorously they have been distancing etc.). Properly targeted testing with tailored transfers give them the incentive to do so.

We also distinguish between testing at work and testing `at home’. An infected person who leaves home to be tested at work poses an infection risk to others who choose to go outside. Testing `at home’ should be interpreted as a way to test an individual without increasing exposure to others. Our model also suggests who should be tested at work and who should be tested at home.

On the 3rd of July, 1638, George Garrard  wrote Viscount Wentworth to tell him:

The Plague is in Cambridge; no Commencement at either of the Universities this year.

On October 2nd of that same year, Cambridge canceled all lectures. Even if history does not repeat (but historians do), one is tempted to look to the past for hints about the future.

From the Annals of Cambridge  (compiled by Charles Henry Cooper ) we learn that the plague combined with the residency requirements for a degree at Oxford, prompted a rush of Oxford students to Cambridge to obtain their Masters of Arts degree. We know this from an anonymous letter to Oxford’s Chancellor:

…..many of Batchelor of Arts of Oxford came this Year for their Degrees of Masters of Arts here, which this Year they could not obtain at Oxford, which I endeavored to prevent……..

This prompted a complaint to Cambridge. Its vice-chancellor replied,

I Pray receive this assurance from me, and I doubt not but the Practice of our University will make it good……

Oxford, in the meantime, maintained country homes for its scholars where they could hide from the Black Death. The plague lowered property values which allowed the colleges to expand their land holdings.

What effect on the intellectual life of the University? Anna Campbell’s 1931 book entitled `The Black Death and Men of Learning‘ estimates that about a third of European intellectual leaders perished during the plague and Universities were in a precarious position.

James Courtenay, writing in 1980  with access to more detailed data about Oxford suggests a less bleak outcome.

The mortality rate was not particularly high , either of brilliant or of marginal scholars and masters. The enrollment levels across the next few decades do not seem to have been seriously affected.

He notes an argument for a drop in the quality of higher education but that would have been a response to a drop in the quality of primary education.

Some days ago I learnt that a job offer to a promising postdoc I advise evaporated. Not unexpected in these times, but disappointing nevertheless . There are now about 300 Universities with hiring pauses or freezes in place.

For Universities that are tuition driven, this is understandable. For those with large endowments of which a large portion are unrestricted this is puzzling. It is true that about 75% of all US university  endowment funds are invested in equities and these have declined since the start of the pandemic. But, the 3 month treasury rate is, at the time I write this, at 0.22%. Why aren’t they borrowing? More generally, why don’t we see consumption smoothing?

An interesting paper by Brown, Dimmock, Kang, and Weisbenner (2014) documents how University endowments respond to shocks. They write:

Our primary finding is that university endowments respond asymmetrically to contemporaneous positive and negative financial shocks. In response to contempo- raneous positive shocks, endowments tend to leave current payouts unchanged. Such behavior is consistent with endowments following their stated payout policies, which are based on past endowment values and not current returns, in order to smooth payouts (e.g., pay out 5 percent of the past three-year average of endowment values).

However, following contemporaneous negative shocks, endowments actively reduce payout rates. Unlike their response to positive shocks, this behavior is inconsistent with endowments following their standard smoothing rules. This asymmetry in the response to positive and negative shocks is especially strong if we explicitly control for the payout rate that is implied by the universities’ stated payout rules (something we do for a subsample of the endowments for which we have sufficient information to precisely document their payout rules). We also fail to find consistent evidence that universities change endowment payouts to offset shocks to other sources of university revenues. These findings, which we confirm through several robustness checks, suggest that endowments’ behavior differs from that predicted by several normative models of endowment behavior.

They argue that their data supports the idea that Universities are engaged in endowment hoarding, i.e.,  maintenance of the endowment is treated as an end in itself. The Association for American Universities argues that endowment hoarding is a myth, see item 9 at this link.  Their response confirms the 3 year average rule but is silent on the asymmetric response to shocks reported above.

More generally, one might ask what is the purpose of a University endowment? Hansmann (1990) offers an interesting discussion of why a University even has an endowment (other enterprises are run through a mixture of debt and equity).  Tobin (1974) articulated one for modeling purposes which I suspect captures what many have in mind:

The trustees of an endowed institution are the guardians of the future against the claims of the present. Their task is to preserve equity among generations. The trustees of an endowed university … assume the institution to be immortal.

If one takes the principle of intergenerational equity seriously, then, would it not make sense to borrow from a better future into a worse present? Unless, of course, it is expected that the future will be even worse than today.

The race to publish COVID-19 related papers is on, and I am already behind. Instead, I will repurpose a paper by Eduard Talamas and myself on networks and infections which is due out in GEB.

It is prompted by the following question: if you are given the option to distribute—without cost to you or anyone else—a perfectly safe but only moderately effective vaccine for a viral infection, should you? That we’ve posed it means the answer must be no or at least maybe not.

Unsurprisingly, it has to do with incentives. When the risk of becoming infected from contact declines, individuals tend to be less circumspect about coming into contact with others. This is risk compensation, first suggested by Charles Adams  in 1879 and popularized by Sam Peltzman in the 1970’s.

Therefore, the introduction of a vaccine has two effects. On the one hand, it reduces the probability that an individual becomes infected upon contact. On the other hand, it decreases individuals’ incentives to take costly measures to avoid contact. If the second effect outweighs the first, there will be an increase in infections upon the introduction of a moderately effective vaccine.

These are statements about infection rates not welfare. Individuals make trade-offs. In this case between the risk of infection and the costs of avoiding it. Therefore, observing that an individual’s infection probability will increase upon introduction of a partially effective vaccine is insufficient to argue against introduction.

In our paper, Eduard and I show that the introduction of a vaccine whose effectiveness falls below some threshold could make everyone worse off, even when each individual is perfectly rational and bears the full cost of becoming infected. If the vaccine is highly effective, this outcome is reversed. This is because risky interactions can be strategic complements. An individual’s optimal amount of risky interactions can be increasing in the amount of risky interactions that others take.

To illustrate, call two individuals that engage in risky interactions partners. Every risky interaction that Ann’s partner Bob has with Chloe affects Ann’s incentives to have risky interactions with Chloe in two countervailing ways. It increases Chloe’s infection probability. But it also increases the probability that Ann is infected conditional on Chloe being infected—because if Chloe is infected, chances are that Ann’s partner Bob is also infected. Given that a risky interaction between Ann and Chloe only increases the probability that Ann becomes infected when Chloe is infected and Ann is not, the combination of these effects can lead to an increase in Ann’s incentives to engage with Chloe and her partners when Bob engages with Chloe.

One might ask, given the huge trove of papers on epidemiological models, this effect must have been identified before and discussed? No, or at least not as far as we could tell. This is because we depart from from a standard feature of these models. We allow agents to strategically choose their partners— instead of only allowing them to choose the number of partners, and then having matches occur uniformly at random.

This morning, a missive from the Econometrics society arrived in my in box announcing “two modest fees associated with the submission and publication of papers in its three journals.” As of May 1st 2020, the Society will assess a submission fee of $50 and a page charge of $10 per page for accepted papers. With papers on the short side running to around 30 pages and 10 page appendices this comes out to about $400. By the standards of the natural sciences this is indeed modest.

At the low end the American Meteorological Society charges $120 per page, no submission fee. In the middle tier, the largest open-access publishers — BioMed Central and PLoS — charge $1,350–2,250 to publish peer-reviewed articles in many of their journals, and their most selective offerings charge $2,700–2,900. At the luxury end of the market is the Proceedings of the National Academy which starts out at $1590 for 6 pages and rises upto $4,215 for a 12 page paper.

My colleague Aislinn Bohren has suggested rewarding referees with free page coupons: publish one page free for each five pages you referee. This may suffer the same fate as the Capitol Hill Baby Sitting co-operative.

In the short run the effect will be to drive papers to JET and GEB as not all academics have research budgets which will cover the fees. An alternative is to submit the paper for $50. If accepted, decline to have it published. Send it elsewhere and send a copy of the acceptance letter to one’s promotion and tenure committee. Voila, a new category in the CV: accepted at Econometrica but not published.

 

 

Time for some game theory about the recent development in Israeli politics. (You can read more about it here)

In the aftermath of the last election, no side could form a governing coalition. So the options were either a unity government, composed of the two major parties (Bibi Netanyahu’s Likud and Benny Gantz’ Kahol-Lavan) or yet another, fourth in a row, election. But with a year of election campaigns sowing hatred throughout the country, the ongoing coronavirus lockdown and an impending recession, nobody wants another election. So the two factions have to bargain on the terms of the unity government, with the possibility of another election being what game theorists call a disagreement point: this is what happens if negotiations break down.

Game theory teaches us that the disagreement point has a significant impact on the outcome, even when the parties reach an agreement, and that the better your position in the disagreement point, the better the bargaining outcome will be for you.

The disagreement point in the negotiation following the last election is impacted by two factors that did not exist in the previous rounds:

  • The coronavirus came as a gift from the gods for Bibi. Frightened citizens usually stick with incumbent leaders in times of crisis, and in Bibi’s case, this tendency is magnified by the fact that he has been around for so many years. Even before the virus popped up, the greatest difficulty of the opposition was to convince the public that he is not the only person who is qualified for the prime-minister job. So an election will be advantageous to Bibi. Moreover, since the election will be postponed until after the lockdown, Bibi will likely stay in power for a long period even under the disagreement point.
  • While he could not form a government, this time Gantz did manage to form a functioning majority coalition in the parliament. He was on the verge of electing a parliamentary speaker from his party, which would allow him to implement a law — the so-called “Bibi law” that forbids Bibi from being appointed for a  prime-minister due to the fact that he was indicted for bribery.

So, in terms of the disagreement point, Bibi has something good going for him and something bad going for him. So he made a threat: If you continue with your current plan to take over the parliament, I will abandon the negotiations and we will jump straight ahead to the disagreement point. Gantz, believing the threat, gave up on the plan. Instead, he promised to give the speakership to somebody from Bibi’s party and to join a government led by Bibi and, and he has split his own party for that purpose, bringing with him only half of it to the new coalition under Bibi.

So now Gantz made the disagreement point much better for Bibi and much worse from himself:
— If there is an election again, Gantz will be viewed as a fool who tore down his party for nothing, and he will likely not be elected.
— Gantz has made public that he too thinks Bibi should be a prime minister. This statement substantiates Bibi’s image as the only qualified person for the job. It also diminishes the moral argument against choosing an indicted person to prime-minister, which was the justification for Bibi’s law and a central theme in the campaign against him.
— Gantz currently took the speakership to himself. Joining Bibi’s government will force him to resign from the speakership, and he has already agreed to give it to Bibi’s party. After Bibi has the speakership, even before the government is formed, it is not possible to pass the Bibi law.

The alternative was to take over the parliament, uncover information about the government’s lack of preparation and incompetent handling of the corona crisis, and meanwhile negotiate secretly over the unity government. But without publicly supporting Bibi as the prime-minster until the deal is reached, all the while keeping the option of passing Bibi’s law if the negotiation fails. It’s hard to predict a bargaining outcome, but I think it is possible that under this plan, even if Bibi would have continued to be the prime minister for some time, we would see a meaningful division of power and a date for the termination of Bibi’s reign. Now there is no such hope.

Why did Gantz give up all his cards? I think the reason is that, because he believed in Bibi’s threat to abandon the negotiations, Gantz thought he had to choose between another election and a unity government. Indeed, Gantz conducted an election poll before he made this move, which suggests he was thinking in these terms.

Bibi’s threat, however, was empty, or, to use another game-theoretic jargon, not credible. The fact that the disagreement point would have become worse for Bibi precisely implies that, whatever he says now, he would have been willing to negotiate in order to escape it. The only difference is that the negotiation would be conducted in an environment that is less convenient to Bibi.
It is also not at all clear that the probability of reaching a deal has increased following Ganz’s move. In fact, an exultant Bibi might insist on terms that even Gantz will not be able to accept.

Many of Gantz’ voters are furious because they preferred another election over a Bibi government. But Gant’s voters who were willing to stomach a Bibi government should also be furious because Gantz created a bargaining environment in which he is desperate to achieve it.

With the move to on-line classes after spring break in the wake of Covid-19, my University has allowed students to opt to take some, all or none of their courses as pass/fail this semester. By making it optional, students have the opportunity to engage in signaling. A student doing well entering into spring break may elect to take the course for a regular grade confident they will gain a high grade. A student doing poorly entering into spring break may elect to take the course pass/fail. It is easy to concoct a simplified model (think Grossman (1981) or Milgrom (1981)) where there is no equilibrium in which all students elect to take the course pass/fail. The student confident of being at the top of the grade distribution has an incentive to choose the regular grading option. The next student will do the same for fear of signaling they had a poor grade and so on down the line. In equilibrium all the private information will unravel.

This simple intuition ignores the heterogeneity in student conditions. It is possible that a student with a good score going into spring break may now face straitened circumstances after spring break. How they decide depends on what inferences they think, others, employers, for example, make about grades earned during this period. Should an employer simply ignore any grades earned during this period and Universities issue Covid-19 adjusted GPAs? Should an employer conclude that a student with a poor grade is actually a good student (because they did not choose the pass/fail option) who has suffered bad luck?

In response to the Covid-19 virus a number of American Universities are moving instruction on-line. Some see this as great natural experiment to test the efficacy of virtual instruction (NO). Others believe it will speed the pace at which instruction  moves on-line (NO). The focus now is on execution at scale in a short period of time.  We would be better off canceling the rest of term and giving all the students A’s.

Here is what I predict will happen. Students will be dilatory in viewing lectures. Temptation and the difficulty of adjusting to new habits will be obstacles. When the exams approach, some will complain that they are unprepared because virtual is not as good as live, their instructor made a hash of things, the absence of live office hours, etc. etc. The exams will be take home without any proctors. While one’s own spirit is willing, there are doubts about the rectitude of one’s classmates.

On the other hand, during this period of exile, perhaps, there will emerge another Newton.

 

An agent with an infectious disease confers a negative externality on the rest of the community. If the cost of infection is sufficiently high, they are encouraged and in some cases required to quarantine themselves. Is this the efficient outcome? One might wonder if a Coasian approach would generate it instead. Define a right to walk around when infected which can be bought and sold. Alas, infection has the nature of public bad which is non-rivalrous and non-excludable. There is no efficient, incentive compatible individually rational (IR) mechanism for the allocation of such public bads (or goods). So, something has to give. The mandatory quarantine of those who might be infected can be interpreted as relaxing the IR constraint for some.

If one is going to relax the IR constraint it is far from obvious that it should be the IR constraint of the infected. What if the costs of being infected vary dramatically? Imagine a well defined subset of the population bears a huge cost for infection while the cost for everyone else is minuscule. If that subset is small, then, the mandatory quarantine (and other mitigation strategies) could be far from efficient. It might be more efficient for the subset that bears the larger cost of infection to quarantine themselves from the rest of the community.

 

Six years ago, I decided to teach intermediate microeconomics. I described my views on how it should be taught in an earlier post. The notes for that course grew into a textbook that is now available in Europe and in the US this April. I am particularly delighted at being able to sport Paolo Ucello’s `The Hunt’ upon the cover. The publishers, Cambridge University Press, asked me to provide an explanation for why I had chosen this, and it appears on the rear cover. Should you make your way to Oxford, be sure to stop by the Ashmolean Museum to see it, the painting of course, in all its glory. I day dream, that like Samuelson’s `Economics’, it will sell bigly.

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