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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.

 

 

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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Over a rabelaisian feast with convivial company, conversation turned to a twitter contretemps between economic theorists known to us at table. Its proximate cause was the design of the incentive auction for radio spectrum. The curious can dig around on twitter for the cut and thrust. A summary of the salient economic issues might be helpful for those following the matter.

Three years ago, in the cruelest of months, the FCC conducted an auction to reallocate radio spectrum. It had a procurement phase in which spectrum would be purchased from current holders and a second phase in which it was resold to others. The goal was to shift spectrum, where appropriate, from current holders to others who might use this scarce resource more efficiently.

It is the procurement phase that concerns us. The precise details of the auction in this phase will not matter. Its design is rooted in Ausubel’s clinching auction by way of Bikhchandani et al (2011) culminating in Milgrom and Segal (2019).

The pricing rule of the procurement auction was chosen under the assumption that each seller owned a single license. If invalid, it allows a seller with multiple licenses to engage in what is known as supply reduction to push up the price. Even if each seller initially owned a single license, a subset of sellers could benefit from merging their assets and coordinating their bids (or an outsider could come in and aggregate some sellers prior to the auction). A recent paper by my colleagues Doraszelski, Seim, Sinkinson and Wang offers estimates of how much sellers might have gained from strategic supply reduction.

Was the choice of price rule a design flaw? I say, compared to what? How about the VCG mechanism? It would award a seller owning multiple licenses the marginal product associated with their set of licenses. In general, if the assets held by sellers are substitutes for each other, the marginal product of a set will exceed the sum of the marginal products of its individual elements. Thus, the VCG auction would have left the seller with higher surplus than they would have obtained under the procurement auction assuming no supply reduction. As noted in Paul Milgrom’s  book, when goods are substitutes, the VCG auction creates an incentive for mergers. This is formalized in Sher (2010). The pricing rule of the procurement auction could be modified to account for multiple ownership (see Bikhchandani et al (2011)) but it would have the same qualitative effect. A seller would earn a higher surplus than they would have obtained under the procurement auction assuming no supply reduction. A second point of comparison would be to an auction that was explicitly designed to discourage mergers of this kind. If memory serves, this reduces the auction to a posted price mechanism.

Was there anything that could have been done to discourage  mergers? The auction did have reserve prices, so an upper limit was set on how much would be paid for licenses. Legal action is a possibility but its not clear whether that could have been pursued without delaying the auction.

Stepping back, one might ask a more basic question: should the reallocation of spectrum have been done by auction? Why not follow Coase and let the market sort it out? The orthodox answer is no because of hold-up and transaction costs. However, as Thomas Hazlett has argued, there are transaction costs on the auction side as well.

 

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