Who's Going to Win the 2014 Nobel Prize in Economics?
It is that time of the year. On Monday, the Nobel Prize in Economics, officially called as Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, will be declared. For two years now, I have been trying to predict the prize. This is primarily because the first time I tried, I got both the awardees, Al Roth and Lloyd Shapley correct. The funny thing though is I wasn’t as much predicting as rooting for them to win in 2012. But then, when the prize was announced people thought I was being prescient. Of course, complaining about such a thing would not have been wise.
Then, in 2013, I took the prediction business seriously and wrote a blog post with a few names. Unsurprisingly, I got them wrong. However, Thompson Reuters, who have been predicting the prize for years, got all of theirs go wrong as well. Be that as it may, without further ado, I present my top three contenders to win the prize in 2014. My predictions are, in part, due to my own taste in economic theory.
1. My first choice would be – Joshua Angrist, David Card, Alan Krueger
It isn’t the case that I know a lot about their work. In fact, I know very little. But the little that I do know is enough to make me realize that they ought to win it someday. Moreover, the prize hasn’t been awarded to the field of empirical economics for a while. They are giants in the field of empirical economics. They have a number of papers talking about schooling and its returns, the effects of draft-lottery on schooling and earnings, earnings of war veterans, effects of teacher testing on teacher performance amongst many other things.
As opposed to the randomized control trials mechanism that is very popular in the literature, theirs is a method of testing a hypothesis using the available data. While there remain obvious questions with a methodology of this sort, very often running randomized control trials is infeasible and / or expensive. Moreover, they have had some incredible theoretical contributions as well to the literature on empirics.
From the context of the recent turn of events, some of Krueger’s work is especially noteworthy. He has a book and a few papers on What makes a terrorist? He questions the idea of poverty being the driver of terrorism. The reason why it is important is from its policy implications. If we lack clarity on poverty and its linkages to terrorism, we will probably never come close to solving these problems.
In a seminal paper by Angrist and Krueger, they demonstrated using a technique of instrumental variables to the effects of Vietnam war. Their contribution to the field of practical, interesting and applied economics is so great that, I would think, it’s only a matter of time before they bag the prize. And then, given that the prize hasn’t gone to econometricians for a while now, this year could be the one.
2. The second choice would be – Philippe Aghion and Peter Howitt
This is Thompson Reuters’ top pick as well. And I too personally think it will be a fantastic choice.
The kind of work that Aghion and Hewitt did is something I respect immensely. Many classical economists starting from Smith to Marx, Ricardo, Malthus and probably up to Schumpeter and Keynes postulated a lot of theories of how the economy works and what would happen to it. While nearly none of them were entirely right or wrong, the problem is verbally one can make almost any argument and make it sound reasonable.
Not to take any significance away from the classical economists, but someone needed to put words into math to see what really was going on behind the theories that these classical economists propounded. One such gap was fixed by Aghion and Howitt through their seminal work on Schumpeter’s story of Creative Destruction. This paper of theirs is amongst the 100 most cited papers in Economics and for the right reasons. It’s beautiful, elegant and makes a point. All you can ask for!
3. The third choice would be Bengt Holmstrom and Paul Milgrom
Yes, I had to bring in game theorists. But then, these two are exceptional minds and it is, in my opinion, only a matter of time before they get the prize. Milgrom is a quite famous name outside academics but I am not sure a lot is known about Holmstrom. They have written, together and separately, some of the most seminal papers in game theory and contract theory. While Milgrom has contributed immensely to the literature on auctions as well as the classical contract theory, Holmstrom’s focus has been more on contracts and incentives. As we all know by now, one of the key drivers of everything in the world is incentives.
A huge number of policies in the real world fail miserably, despite good intentions, because they fail to address the issue of incentives that is at the heart of everything. Almost entire game theory focuses on incentives and a lot of what we know today in economics, a lot of what economics has taught in terms what we should be looking at and what we should be aiming for, is a product of extensive research on the world of incentives.
Holmstrom and Milgrom, through their joint work and work separately, have looked at questions of incentives such as the kind of contracts one can obtain in a Principal-Agent framework when the agent’s actions aren’t observable to the principal or the boss, the kind of contracts that would result within firms, large and small etc.
Needless to say that there have been number of other economists who have contributed to these fields. In no particular order the famous Stanford Gang of Four (David Kreps, Paul Milgrom, Robert Wilson and John Roberts) have to win the prize some day. And so does Holmstrom have to win it one day. Therefore, either the committee would give the Gang of Four an award in one shot or split it in some way. My hunch is they will split it and may begin with Holmstrom and Milgrom. Hence the prediction.
Lastly, I am probably as cluleless as many others on many fields in economics. So I must have overlooked some big names in fields I have no clue about. And then, when even the Marginal Revolution guy never got the prediction right even once, why should I worry? I am sure the committee will make a great choice.
The fun of prediction is not so much in getting it right but it’s in getting some names right and letting their work reach to the people as time goes on. After all, economics is a science related to people and their behavior. So, if anyone tries reading and also educating me on some work of someone from my list or someone else the point of this prediction would be well-achieved. Let’s wait for Monday then.