The Nobel Prize in Economic Science Goes to Banerjee, Duflo, and Kremer

The Nobel Prize goes to Abhijit Banerjee, Esther Duflo and Michael Kremer (links to home pages) for field experiments in development economics. Esther Duflo was a John Bates Clark Medal winner, a MacArthur “genius” award winner, and is now the second woman to win the economics Nobel and by far the youngest person to ever win the economics Nobel (Arrow was the previous youngest winner!). Duflo and Banerjee are married so these are also the first spouses to win the economics Nobel although not the first spouses to win Nobel prizes–there was even one member of a Nobel prize winning spouse-couple who won the Nobel prize in economics. Can you name the spouses?

Michael Kremer wrote two of my favorite papers ever. The first is Patent Buyouts which you can find in my book Entrepreneurial Economics: Bright Ideas from the Dismal Science. The idea of a patent buyout is for the government to buy a patent and rip it up, opening the idea to the public domain. How much should the government pay? To decide this they can hold an auction. Anyone can bid in the auction but the winner receives the patent only say 10% of the time–the other 90% of the time the patent is bought by the government at the market price. The value of this procedure is that 90% of the time we get all the incentive properties of the patent without any of the monopoly costs. Thus, we eliminate the innovation tradeoff. Indeed, the government can even top the market price up by say 15% in order to increase the incentive to innovate. You might think the patent buyout idea is unrealistic. But in fact, Kremer went on to pioneer an important version of the idea, the Advance Market Commitment for Vaccines which was used to guarantee a market for the pneumococcal vaccine which has now been given to some 143 million children. Bill Gates was involved with governments in supporting the project.

My second Kremer paper is Population Growth and Technological Change: One Million B.C. to 1990. An economist examining one million years of the economy! I like to say that there are two views of humanity, people are stomachs or people are brains. In the people are stomachs view, more people means more eaters, more takers, less for everyone else. In the people are brains view, more people means more brains, more ideas, more for everyone else. The people are brains view is my view and Paul Romer’s view (ideas are nonrivalrous). Kremer tests the two views. He shows that over the long run economic growth increased with population growth. People are brains.

Oh, and can I add a third Kremer paper? The O-Ring Model of Development is a great and deep paper. (MRU video on the O-ring model).

The work for which the Nobel was given is for field experiments in development economics. Kremer began this area of research with randomized trials of educational policies in Kenya. Duflo and Banerjee then deepened and broadened the use of field experiments and in 2003 established the Poverty Action Lab which has been the nexus for field experiments in development economics carried on by hundreds of researchers around the world.

Much has been learned in field experiments about what does and also doesn’t work. In Incentives Work, Dufflo, Hanna and Ryan created a successful program to monitor and reduce teacher absenteeism in India, a problem that Michael Kremer had shown in Missing in Action was very serious with some 30% of teachers not showing up on a typical day. But when they tried to institute a similar program for nurses in Putting a Band-Aid on A Corpse the program was soon undermined by local politicians and “Eighteen months after its inception, the program had become completely ineffective.” Similarly, Banerjee, Duflo, Glennerster and Kinnan find that Microfinance is ok but no miracle (sorry fellow laureate Muhammad Yunus). A frustrating lesson has been the context dependent nature of results and the difficult of finding external validity. (Lant Pritchett in a critique of the “randomistas” argues that real development is based on macro-policy rather than micro-experiment. See also Bill Easterly on the success of the Washington Consensus.)

Duflo, Kremer and Robinson study How High Are Rates of Return to Fertilizer? Evidence from Field Experiments in Kenya. This is an especially interest piece of research because they find that rates of return are very high but that farmers don’t use much fertilizer. Why not? The reasons seem to have much more to do with behavioral biases than rationality. Some interventions help:

Our findings suggest that simple interventions that affect neither the cost of, nor the payoff to, fertilizer can substantially increase fertilizer use. In particular, offering farmers the option to buy fertilizer (at the full market price, but with free delivery) immediately after the harvest leads to an increase of at least 33 percent in the proportion of farmers using fertilizer, an effect comparable to that of a 50 percent reduction in the price of fertilizer (in contrast, there is no impact on fertilizer adoption of offering free delivery at the time fertilizer is actually needed for top dressing). This finding seems inconsistent with the idea that low adoption is due to low returns or credit constraints, and suggests there may be a role for non–fully rational behavior in explaining production decisions.

This is reminiscent of people in developed countries who don’t adjust their retirement savings rates to take advantage of employer matches. (A connection to Thaler’s work).

Duflo and Banerjee have conducted many of their field experiments in India and have looked at not just conventional questions of development economics but also at politics. In 1993, India introduced a constitutional rule that said that each state had to reserve a third of all positions as chair of village councils for women. In a series of papers, Duflo studies this natural experiment which involved randomization of villages with women chairs. In Women as Policy Makers (with Chattopadhyay) she finds that female politicians change the allocation of resources towards infrastructure of relevance to women. In Powerful Women (Beaman et al.) she finds that having once had a female village leader increases the prospects of future female leaders, i.e. exposure reduces bias.

Before Banerjee became a randomistas he was a theorist. His A Simple Model of Herd Behavior is also a favorite. The essence of the model can be explained in a simple example (from the paper). Suppose there are two restaurants A and B. The prior probability is that A is slightly more likely to be a better restaurant than B but in fact B is the better restaurant. People arrive at the restaurants in sequence and as they do they get a signal of which restaurant is better and they also see what choice the person in front of them made. Suppose the first person in line gets a signal that the better restaurant is A (contrary to fact). They choose A. The second person then gets a signal that the better restaurant is B. The second person in line also sees that the first person chose A, so they now know one signal is for A and one is for B and the prior is A so the weight of the evidence is for A—the second person also chooses restaurant A. The next person in line also gets the B signal but for the same reasons they also choose A. In fact, everyone chooses A even if 99 out of 100 signals are B. We get a herd. The sequential information structure means that the information is wasted. Thus, how information is distributed can make a huge difference to what happens. A lot of lessons here for tweeting and Facebook!

Banerjee is also the author of some original and key pieces on Indian economic history, most notably History, Institutions, and Economic Performance: The Legacy of Colonial Land Tenure Systems in India (with Iyer).

Duflo’s TED Talk. Previous Duflo posts; Kremer posts; Banerjee posts on MR.

Before last year’s Nobel announcement Tyler wrote:

I’ve never once gotten it right, at least not for exact timing, so my apologies to anyone I pick (sorry Bill Baumol!). Nonetheless this year I am in for Esther Duflo and Abihijit Banerjee, possibly with Michael Kremer, for randomized control trials in development economics.

As Tyler predicted he was wrong and also right. Thus, this years win is well-timed and well-deserved. Congratulations to all.

Comments

Congratulations to the latest winners of the Nobel(ish) prize in economics.

How directly connected this is to some dude's dynamite-induced guilt trip remains incredibly important to some people.

I consider your comment to be progress(ish) on this front.

Trump will never receive a Nobel. Econ or Peace.

That's the troll again. Don't know what the deal is, if any resulting argument is good enough, or if the troll actually has a political purpose.

If the troll gets trolled, does anyone care? FWIW I wish you would both stop posting. YMMV

Current affairs are on us, Mr. Ostrich.

He's making fun of your misplaced earnestness and lack of self-awareness.

I mean,

"Met young women here from all-women Christian force this May for next book. They spoke w/pride about working w/US to defeat ISIS, which had kidnapped Christians from their community, & about protecting their towns from extremists. Now, a few months later, fear for their lives."

Which would be the bigger error for an American, especially an American Christian, today?

To be earnest, or to say "my topic is more important?"

https://twitter.com/gaylelemmon/status/1183399724386140160?s=19

Does the peace Nobel even mean anything anymore?

I mean, Obama and the EU have one.

'How directly connected this is to some dude's dynamite-induced guilt trip'

But this is precisely the point- this Nobel(ish) prize is pure PR, and has absolutely nothing to do with Nobel's guilt trip.

This glaringly obvious point, however, needs to be dismissed, otherwise economists just look like a group desperately seeking any way possible to enhance themselves, by attempting to attach themselves to something that people already respect.

"Economists" didn't choose to associate themselves with the Nobel Prize, Sveriges Riksbank established this. And the Nobel Committee seems to have no problem administering it and treating it as equivalent to the original prizes.

It’s amazing how every year somebody feels compelled to point out that the economics prize was not an original Nobel Prize.

Guess what, there was no Oscar for best documentary until the 1940s. Is it therefore only Oscar(ish)?

And that pedantic somebody somehow thinks we don't know it's technically not a Nobel prize. As if he/she is giving us some deep inside knowledge.

Many people seem to have an instinct that economists are prone to lying. That ought to provide an incentive for them to stop lying about the counterfeit Nobel Prize. But it doesn't seem to have that effect. Does this mean that economists don't believe in the power of incentives after all?

Gunnar and Alva Myrdal both won prizes. Gunnar in 74 econ prize and Alva 1982 peace prize.

The Nobel Peace Prize is not a Nobel(ish) prize.

And Trump will never get one.

Economists do not have anything of use to say if we end up with Trump.

The Sun also rises on Tralfamadore.

President Donald J. Trump doesn't want one.

The Nobel Committee lost whatever credibility it may have had when it awarded a Peace Prize to Obama before he started multiple unnecessary wars and killed hundreds in bombings and drone attacks.

Trump 2020.

He groveled to Abe to get him one. You’re pathetic.

The question for Trump in 2020 is whether he will be in Federal or State prison. The question for the US is what do we do with his supporters.

FART

What will you [plural] do with me?

I had thought it impossible for someone to be that stupid. Then, I read about the idiotic Dem primary candidates' totalitarian nightmares.

FART

Clean water and free healthcare, paid for by a wealth tax.

What a totalitarian nightmare.

"The Nobel Peace Prize is not a Nobel(ish) prize."

Quite right: being an embarrassment doesn't alter the fact that it is genuine, not counterfeit.

"as many as 2,600 people who said they wanted their names removed from Krupa’s petitions likely didn’t sign them in the first place."

https://www.chicagotribune.com/investigations/ct-madigan-13th-ward-quinn-election-20191010-6p6bexkfr5htnpbontth2dixeq-story.html

Regarding brains versus stomachs, this recent paper argues private property came before, and enabled, agriculture:

The Neolithic Agricultural Revolution and the Origins of Private Property
https://www.journals.uchicago.edu/doi/10.1086/701789

Doesn't really explain the emergence of farming in the Americas, though.

I was involved in the purchase of numerous companies that controlled patents and or the patents them selves . There is no way I would have spent time money and resources bidding when I had a better than 90% chance of losing. The winning bid would be a fraction of true economic value. The result would be a significant reduction in the incentive to innovate.

Most bidders lose in any auction.

if that is the case, why would you arbitrarily instill a 90% chance of losing into the auction? Why can't the government just bid the market price like everyone else?

You are just wrong on this one Alex. Start with the fact that one bidder the Government has a 90% chance of winning. Say there are 10 other bidders. That puts your chances of winning at 1% or less. No company I know of would spend scarce and expensive resources bidding on a patent they have less than a 1% chance of winning.

What probably would happen is that there would be a new activity that would involve shill bids to drive up the price and more corruption would be in place.

But the non-winning bidders won't pay anything, so what's the problem?
If you win and have luck in the lottery, you get to use (and exploit) the patent, with real value you've paid.
Otherwise, you don't. What's the problem? You won't "overpay" (esp. if second-price takes care of winner's curse).
Yes, some resources will be spent learning about what the patent does - but that you may want to know in any case.

You clearly have neve spent anytime working in M&A . There are finite resources and finite capital budgets which provide significant constraints on which projects you can work on. Every bid requires a careful analyses of the patent itself including among other things how it fits into the business model of the company, the potential returns, the difficulty and cost of bringing it to market successfully. the existence of competing ideas to do the same thing and many other issues. It takes months to do the job effectively. If you are in charge of M&A you cannot miss 99% of the time or you will be quickly unemployed. No CEO or Board or group of stockholders would tolerate that failure rate.

I’ve also worked in Massachusetts and I disagree with your analysis. But the whole scheme seems unnecessary. The government should offer a fair price for patents, and if the seller refuses should appropriate the IP anyways and transfer to the public domain.

It all comes from our Universities and then these corporations get to profit from taxpayer funded research and charge exorbitant prices for drugs.

Call it eminent domain for intellectual property. We paid for it in taxes, it belongs to the citizenry. Corporations add little value in the process.

Strange because very few of the patents probably less than 5% were University related. Certainly not all of them as you suggest.

Thank you, Alex. This is a good paper I hope policymakers take a long look at how the patent system could be improved for more innovation rather than act as government-enforced speed brakes.

Your bid should take into account the probability that you don't actually receive the patent (or however it works) and the cost of bidding. When the value of the patent is large, then this cost should be small in comparison.

But when the value of the patent is large, who believes that a winning buyer would actually be allowed to retain it even if they won the 1 in 10 lottery? The whole point of the program is to avoid high costs for critical inventions like life-saving drugs. If a corporation won, wouldn't people demand that the sale be cancelled? How many voters would really understand that, no, this 10% clause is really necessary to make the pricing system work?

It's a model.
IRL it doesn't have to be 90% - or even exactly the same system, as Alex's header pointed out.

Totally agree on the well deserved, but on well-timed: we have a glut of past ideas awaiting recognition. We barely recognized Ostrom before it was too late. Missed Baumol, Demsetz, and Schwartz. Can we hit a few of our old timers before we lose them to history?

Stupid that this is a consideration really. They should go the way of the Catholic Church and allow posthumous awards.

Agreed. But since they don't, and the discipline has much to recognize in its past...

But it's a great award. Three cheers for development and three cheers for field experiments!

A nice article. As trivia, local Thai restaurants are starting to put "street food" in their names. From my low N study, this is a good signal. It means they are willing "Thai or American style Thai food."

A case where naming does hint at value.

"Similarly, Banerjee, Duflo, Glennerster and Kinnan find that Microfinance is ok but no miracle (sorry fellow laureate Muhammad Yunus)."

Is anyone familiar with the effectiveness of microfinance for specific types of lending situations? There is an NGO in Kenya (One Acre Fund) that only lends to smallholder farmers to buy fertilizer and seed and in addition gives the borrowers training in agriculture. It is an idea that struck me as having the potential to be very effective because it sticks to smallholder farmers and inputs. Conventional microfinance lends to borrowers in all kinds of situations.

I don't doubt these individuals are most deserving of a Nobel. However, a (too) large number of deserving economists went to their grave before receiving one. Start with the oldest first.

Arguments like this are maybe one reason why the Fields medal winners are often high-quality compared to Nobel prize winners (if we're willing to compare apples to oranges here). The under 40 age limit is an issue in some obvious ways but it more or less guarantees that winners get an award for work that is on the frontier of knowledge rather than for ideas which have long since been absorbed into the air the discipline breathes.

But that's why the economists have the Bates Clark Award for young economists. Strong Nobel predictor. However, it tends to shut out those who weren't considered elite early in life, nor plugged in at Cambridge or Chicago. The Nobel has rewarded a large number of those who were eventually quite influential but outside the mainstream when young, e.g. Coase, Buchanan, North, Smith, Ostrom, etc. Inasmuch as Econ is a very inexact subject it is important to consider the role of longer term influence even if ultimately the fairest prizes would go to work posthumously. But if you want to motivate researchers a big, near end of life prize is not a bad thing at all for those near the top. Note that even Physics tends to award the prize to theorists quite late in their careers because they want evidence that the theories are viable as well as influential.

I'm stunned, shocked, that farmers in Kenya don't utilize long time horizons when thinking about whether to spend today's money on fertilizer. It's almost as if...

I think you might have it backwards. As I understand it, farmers are willing to pay for the fertilizer with free delivery far ahead of time (at the time they are paid for the previous harvest), but not right before planting. My assumption is that's because by the time the next planting has rolled around, there will have been demands on the money (from their families or friends and relatives) that they'll have had a hard time saying no to. But if they buy the fertilizer before they need it, they won't have the 'extra' money and won't have to worry about not being able to say no to all those requests. That seems like long-term thinking to me.

Don't understand how someone, especially(?) economists, could believe in a dichotomy of stomachs vs. brains. Or that one or the other would only ever dominate.

"Lant Pritchett in a critique of the “randomistas” argues that real development is based on macro-policy rather than micro-experiment. See also Bill Easterly on the success of the Washington Consensus."

Washington, yeah. Development grows from the barrel of a gun.

Is the Nobel prize a lifetime achievement price as opposed to a prize for best new development? The randomistas have been going at it for years now.

chrisare,

No Nobel prize, including the Sveriges Riksbank one for Economics Science in Menory of Alfred Nobel, is for "best new development," and none of them ever have been. They are given for achievements that were done some time in the past whose significance has been proven over time by influence and citations and so on. New developments are simply too new to deserve one, in any field, although sometimes the Peace one is for a recent development. But then it is not about ideas but actions.

Indeed, one of the few criticisms of the one this year is that maybe it should have been delayed a few more years, especially to have John List get it before these folks did.

"Is the Nobel prize a lifetime achievement prize as opposed to a prize for best new development?" It's the latter, though with the absurd specification that the work has been done in the last year.

As for the counterfeit Nobel Prize, I don't know.

Why are you spreading the lie that there is such a thing as a Nobel Prize in economics?

Thanks for this - very helpful!. Also you wrote; "This is reminiscent of people in developing countries who don’t adjust their retirement savings rates to take advantage of employer matches. (A connection to Thaler’s work)." Did you mean "developed countries"?

Yes. Thanks. Fixed.

This is a nice post.

In particular, offering farmers the option to buy fertilizer (at the full market price, but with free delivery) immediately after the harvest leads to an increase of at least 33 percent in the proportion of farmers using fertilizer, an effect comparable to that of a 50 percent reduction in the price of fertilizer (in contrast, there is no impact on fertilizer adoption of offering free delivery at the time fertilizer is actually needed for top dressing).
---
Scale effects. Right after harvest the farmer knows his yields most accurately and can predict next season's total fertilizer needs. So he buys in bulk. Somewhere we have gains to scale, and it is reflected in delivery price.

The entire farm season works like this, in seasonal chunks. The flows generally happen once per season, seed, fertilizer, harvesting,... The big barns are a clue.

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