1. On the history and use of EUAs (NYT).
5. The value of rapid self-testing for Covid-19. Yes it works and the medical professionals and the FDA are wrong on this one.
6. Logistical problems with supplying monoclonal antibodies, important. It is time to stop dumping on this treatment people, and get our act together. Now. Let’s not have another fiasco. And a good NYT story on the whole topic, you can feel the media mood shifting toward the positive and away from the skeptical.
7. Can you even win at the Japanese crane game? What else is like this?
8. The captain of Operation Warp Speed (WSJ).
9. How it enters your brain. Or might.
10. A Fine Theorem on Milgrom and Wilson, recommended, note that Milgrom also does not have a Ph.D. in economics.
The 2020 Nobel Prize in Economics goes to Paul Milgrom and Robert Wilson for auction theory and the improvement of auction designs. The Nobel Committee has a popular introduction and good scientific overview of auction theory. Billions of dollars of spectrum and other natural resources have been allocated using auctions designed by Milgrom and Wilson and their co-authors.
The money won’t mean much to these winners, who have made plenty of money advising firms about how to bid in the auctions that they designed. Milgrom’s firm Auctionomics advertises its service and Milgrom notes:
Milgrom has advised bidders in radio spectrum auctions, power auctions, and bankruptcy auctions. One advisee, Comcast and its consortium, SpectrumCo, followed the advice of a Milgrom’s team in FCC Auction 66 to achieve the most exceptional performance in US spectrum auction history. SpectrumCo saved nearly $1.2 billion on its spectrum license purchases compared to the prices paid by other large bidders – such as T-Mobile and Verizon – for comparable spectrum acquired at the same time in the same auction. SpectrumCo’s tactics included a $750 million jump bid – the largest in the history of US spectrum auctions and a move that prompted the FCC to change the auction rules.
You can figure that Milgrom got a percentage of those savings! Milgrom also advised Yahoo and Google, among other tech firms, on their advertising auctions.
My post Mechanism Design for Grandma written for the Hurwicz, Maskin and Myerson Nobel, has some background on auctions.
Auction theory and auction practice arose together–this is not a case of theory being rediscovered decades later by practitioners but of the demands by practitioners leading to new theory and new theory leading to new institutions. The Nobel committee notes:
In the early 1990s, an explosion of the demand for mobile communication made the U.S. federal government decide to use an auction for allocating radio-spectrum licenses among telecommunication firms. Previously, the U.S. Federal Communications Commission (FCC) had only been allowed to rely either on administrative procedures—commonly referred to as “beauty contests”—or on lotteries. These methods had notably failed in a number of complex settings, at the expense of both taxpayers and end-users…The obvious alternative is to adopt an auction to as-sign licenses. In fact, as early as in the 1950s, the 1991 Laureate Ronald H. Coase argued that the basic principle should be to allocate objects, such as broadcasting licenses, to the firms who will make the most efficient use of them, and the best way to identify these firms is to assign the objects through a competitive price mechanism (Coase, 1959).
…Following the FCC policy shift, multi-object auctions turned from an esoteric topic at the fringe of microeconomic theory to a hot research topic almost overnight.
…For the 1994 FCC auction, the final version of the newly designed auction was the Simultaneous Multiple Round Auction (SMRA)…[which] raised some $20 billion for the U.S. federal government, twice the forecasted amount. This outcome attracted considerable media attention and led other governments to set up their own auctions. The U.K. 3G spectrum auction that concluded in 2000 raised about $34 billion for the British government (Binmore and Klemperer, 2002). The SMRA auction format became the dominant design for spectrum sales worldwide, and versions of it have been used in Canada, Finland, Germany, India, Norway, Poland, Spain, Sweden, theU.K., and the U.S. These auctions have generated hundreds of billions of dollars for governments worldwide.
Perhaps the most impressive culmination of this work was the 2017 incentive auctions which “simultaneously” bought licenses from over-the air broadcast television stations and resold them to modern cellular phone bidders while respecting constraints so that over-the-air frequencies could be repackaged in ways such that they would not interfere with one another. The auction bought licenses for $10 billion, sold them for $20 billion, generating $10 billion in profit and generating an even larger increase in consumer surplus.
The first is a reverse auction that determines a price at which the remaining over-the-air broadcasters voluntarily relinquish their existing spectrum-usage rights. The second is a forward auction of the freed-up spectrum. In 2017, the reverse auction removed 14 channels from broadcast use, at a cost of $10.1 billion. The forward auction sold 70 MHz of wireless internet licenses for $19.8 billion, and created 14 MHz of surplus spectrum. The two stages of the incentive auction thus generated just below $10 billion to U.S. taxpayers, freed up considerable spectrum for future use, and presumably raised the expected surpluses of sellers as well as buyers.
These auctions also brought home that economics is now tied to computer science. The complexity of the allocation process was so high that new algorithms had to be devised. In particular, repackaging of the frequencies involved solving hundreds of thousands of graph-coloring problems, an NP-hard problem. Computer scientist Kevin Leyton-Brown was brought in to design and optimize the necessary algorithms. At the same time, Milgrom and Segal had to prove that their auction could be characterized in such a way that it could be solved in reasonable time by known algorithms.
Computer scientist Tim Roughgarden has an excellent video lecture on how implementing the incentive auction required a combination of cutting-edge economics and computer science. More generally, mechanism design in the real world, including auction design, Uber’s supply and demand mechanism, blockchains like bitcoin and many other examples, requires both economists and computer scientists to devise institutions and algorithms that incentivize socially beneficial behavior and that can also be solved in real time for real populations.
Most of all this is a game theory prize and an economics of information prize, including game theory and asymmetric information. Much of the work has had applications to auctions and finance. Basically Milgrom was the most important theorist of the 1980s, during the high point of economic theory and its influence.
Here is Milgrom’s (very useful and detailed) Wikipedia page. Most of his career he has been associated with Stanford University, with one stint at Yale for a few years. Here is Milgrom on scholar.google.com. A very good choice and widely anticipated, in the best sense of that term. Here is his YouTube presence. Here is his home page.
Milgrom, working with Nancy Stokey, developed what is called the “no trade” theorem, namely the conditions under which market participants will not wish to trade with each other. Obviously if someone wants to trade with you, you have to wonder — what does he/she know that I do not? Under most reasonable assumptions, it is hard to generate a high level of trading volume, and that has remained a puzzle in theories of finance and asset pricing. People are still working on this problem, and of course it relates to work by Nobel Laureate Robert Aumann on when people should rationally disagree with each other.
Building on this no-trade result, Milgrom wrote a seminal piece with Lawrence Glosten on bid-ask spread. What determines bid-ask spread in securities markets? It is the risk that the person you are trading with might know more than you do. You will trade with them only when the price is somewhat more advantageous to you, so markets with higher degrees of asymmetric information will have higher bid-ask spreads. This is Milgrom’s most widely cited paper and it is personally my favorite piece of his, it had a real impact on me when I read it. You can see that the themes of common knowledge and asymmetric information, so important for the auctions work, already are rampant.
Alex will tell you more about auctions, but Milgrom working with Wilson has designed some auctions in a significant way, see Wikipedia:
Milgrom and his thesis advisor Robert B. Wilson designed the auction protocol the FCC uses to determine which phone company gets what cellular frequencies. Milgrom also led the team that designed the 2016-17 incentive auction, which was a two-sided auction to reallocate radio frequencies from TV broadcast to wireless broadband uses.
Here is Milgrom’s 277-page book on putting auction theory to practical use. Here is his highly readable JEP survey article on auctions and bidding, for an introduction to Milgrom’s prize maybe start there?
Here is Milgrom’s main theoretical piece on auctions, dating from Econometrica 1982 and co-authored with Robert J. Weber. it compared the revenue properties of different auctions and showed that under risk-neutrality a second-price auction would yield the highest price. Also returning to the theme of imperfect information and bid-ask spread, it showed that an expert appraisal would make bidders more eager to bid and thus raise the expected price. I think of Milgrom’s work as having very consistent strands.
With Bengt Holmstrom, also a Nobel winner, Milgrom wrote on principal-agent theory with multiple tasks, basically trying to explain why explicit workplace incentives and bonuses are not used more widely. Simple linear incentives can be optimal because they do not distort the allocation of effort across tasks so much, and it turned out that the multi-task principal agent problem was quite different from the single-task problem.
People used to think that John Roberts would be a co-winner, based on the famous Milgrom and Roberts paper on entry deterrence. Basically incumbent monopolists can signal their cost advantage by making costly choices and thereby scare away potential entrants. And the incumbent wishes to be tough with early entrants to signal to later entrants that they better had stay away. In essence, this paper was viewed as a major rebuttal to the Chicago School economists, who had argued that predatory behavior from incumbents typically was costly, irratoinal, and would not persist.
The absence of Roberts’s name on this award indicates a nudge in the direction of auction design and away from game theory a bit — the Nobel Committee just loves mechanism design!
That said, it is worth noting that the work of Milgrom and co-authors intellectually dominated the 1980s and can be identified with the peak of influence of game theory at that period of time. (Since then empirical economics has become more prominent in relative terms.)
Milgrom and Roberts also published a once-famous paper on supermodular games in 1990. I’ve never read it, but I think it has something to do with the possible bounding of strategies in complex settings, but based on general principles. This was in turn an attempt to make game theory more general. I am not sure it succeeded.
Milgrom and Roberts also produced a well-known paper finding the possible equilibria in a signaling model of advertising.
Milgrom and Roberts also wrote a series of papers on rent-seeking and “influence activities” within firms. It always seemed to me this was his underrated work and it deserved more attention. Among other things, this work shows how hard it is to limit internal rent-seeking by financial incentives (which in fact can make the problem worse), and you will see this relates to Milgrom’s broader work on multi-task principal-agent problems.
Milgrom also has a famous paper with Kreps, Wilson, and Roberts, so maybe Kreps isn’t going to win either. They show how a multi-period prisoner’s dilemma might sustain cooperating rather than “Finking” if there is asymmetric information about types and behavior. This paper increased estimates of the stability of tit-for-tat strategies, if only because with uncertainty you might end up in a highly rewarding loop of ongoing cooperation. This combination of authors is referred to as the “Gang of Four,” given their common interests at the time and some common ties to Stanford. You will note it is really Milgrom (and co-authors) who put Stanford economics on the map, following on the Kenneth Arrow era (when Stanford was not quite yet a truly top department).
Not what he is famous for, but here is Milgrom’s paper with Roberts trying to rationalize some of the key features of modern manufacturing. If nothing else, this shows the breadth of his interests and how he tries to apply game theory generally. One question they consider is why modern manufacturing has moved so strongly in the direction of greater flexibility.
Milgrom also has a 1990 piece with North and Weingast on the medieval merchant guilds and the economics of reputation, showing his more applied side. In essence the Law Merchant served as a multilateral reputation mechanism and enforced cooperation. Here is a 1994 follow-up. This work paved the way for later work by Avner Greif on related themes.
The Invisibility Hypothesis holds that the job skills of disadvantaged workers are not easily discovered by potential new employers, but that promotion enhances visibility and alleviates this problem. Then, at a competitive labor market equilibrium, firms profit by hiding talented disadvantaged workers in low-level jobs.Consequently, those workers are paid less on average and promoted less often than others with the same education and ability. As a result of the inefficient and discriminatory wage and promotion policies, disadvantaged workers experience lower returns to investments in human capital than other workers.
With multiple, prestigious co-authors he has written in favor of prediction markets.
He was the doctoral advisor of Susan Athey, and in Alex’s post you can read about his auction advising and the companies he has started.
His wife, Eva Meyersson Milgrom, is herself a renowned social scientist and sociologist, and he met her in 1996 while seated next to her at a Nobel Prize dinner in Stockholm. Here is one of his papers with her (and Ravi Singh), on whether firms should share control with outsiders. Here is the story of their courtship.
Here is his home page. He has been at Stanford Business School since 1964, and born in Geneva, Nebraska. Here is his personal website. Here is his Wikipedia page. He has a doctorate in business administration from Harvard, but actually no economics Ph.D. (bravo!) Here is the Nobel designation.
Most of all Wilson is an economic theorist, doing much of his most influential work in or around the 1980s. He is a little hard to google (no, he did not work with Philip Glass), but here are his best-cited papers. To be clear, he won mainly for his work in auction theory and practice, covered by Alex here. But here is some information about the rest of his highly illustrious career.
He and David Kreps wrote a very famous paper about deterrence. Basically an incumbent wishes to develop a reputation for being tough with potential entrants, so as to keep them out of the market. This was one of the most influential papers of the 1980s, and it also helped to revive some of the potential intellectual case for antitrust activism. Here is Wilson’s survey article on strategic approaches to entry deterrence.
Wilson has a famous paper with Kreps, Milgrom, and Roberts. They show how a multi-period prisoner’s dilemma might sustain cooperating rather than “Finking” if there is asymmetric information about types and behavior. This paper increased estimates of the stability of tit-for-tat strategies, if only because with uncertainty you might end up in a highly rewarding loop of ongoing cooperation. This combination of authors is referred to as the “Gang of Four,” given their common interests at the time and some common ties to Stanford.
His 1982 piece with David Kreps on “sequential equilibria” was oh so influential on game theory, here is the abstract:
We propose a new criterion for equilibria of extensive games, in the spirit of Selten’s perfectness criteria. This criterion requires that players’ strategies be sequentially rational: Every decision must be part of an optimal strategy for the remainder of the game. This entails specification of players’ beliefs concerning how the game has evolved for each information set, including information sets off the equilibrium path. The properties of sequential equilibria are developed; in particular, we study the topological structure of the set of sequential equilibria. The connections with Selten’s trembling-hand perfect equilibria are given.
Here is a more readable exposition of the idea. This was part of a major effort to figure out how people actually would play in games, and which kinds of solution concepts economists should put into their models. I don’t think the matter ever was settled, and arguably it has been superseded by behavioral and computational and evolutionary approaches, but Wilson was part of the peak period of applying pure theory to this problem and this might have been the most important theory piece in that whole tradition.
Wilson’s paper “The Theory of the Syndicates,”JSTOR 1909607 which was published in Econometrica in 1968 influenced a whole generation of students from economics, finance, and accounting. The paper poses a fundamental question: Under what conditions does the expected utility representation describe the behavior of a group of individuals who choose lotteries and share risk in a Pareto-optimal way?
Link here, this was a contribution to social choice theory and fed into Oliver Hart’s later work on when shareholder unanimity for a corporation would hold. It also connects to the later Milgrom work, some of it with Wilson, on when people will agree about the value of assets.
Here is Wilson’s book on non-linear pricing: “What do phone rates, frequent flyer programs, and railroad tariffs all have in common? They are all examples of nonlinear pricing. Pricing is nonlinear when it is not strictly proportional to the quantity purchased. The Electric Power Research Institute has commissioned Robert Wilson to review the various facets of nonlinear pricing.” Yes, he is a business school guy. Here is his survey article on electric power pricing, a whole separate direction of his research.
Here is his 1989 law review article about Pennzoil vs. Texaco, with Robert H. Mnookin.
Wilson also did a piece with Gul and Sonnenschein, laying out the different implications of various game-theoretic conjectures for the Coase conjecture, namely the claim that a durable goods monopolist will end up having to sell at competitive prices, due to the patience of consumers and their unwillingness to buy at higher prices.
Wilson was the dissertation advisor of Alvin E. Roth, Nobel Laureate, and here the two interview each other, recommended. Excerpt:
Wilson: As an MBA student in 1960, I wrote a class report on how to bid in an auction that got a failing grade because it was not “managerial.”
And here is an Alvin Roth blog post on the prize and the intellectual lineage.
The bottom line? If you are a theorist, Stockholm is telling you to build up some practical applications — at the very least pull something out of your closet and sell it on eBay! A lot of people thought Roberts and maybe Kreps would be in on this Prize, but they are not. The selections themselves are clearly deserving and have been “in play” for many years in the Nobel discussions. But again, we see the committee drawing clear and distinct lines.
Let’s see what they do next year!
1. The (NBA) bubble is ending soon. A good piece.
3. What is it like to be threatened by The New York Times Guild? And with typographical errors.
It would seem so, now there are lots of them, here is one part of my Bloomberg column:
The Nobel Peace Prize this year went to the World Food Programme, part of the United Nations. Yet the Center for Global Development, a leading and highly respected think tank, ranked the winner dead last out of 40 groups as measured for effectiveness. Another study, by economists William Easterly and Tobias Pfutze in 2008, was also less than enthusiastic about the World Food Programme.
The most striking feature of the award is not that the Nobel committee might have gotten it wrong. Rather, it is that nobody seems to care. The issue has popped up on Twitter, but it is hardly a major controversy.
I also noted that the Nobel Laureates I follow on Twitter, in the aggregate, seem more temperamental than the 20-year-olds (and younger) that I follow. Hail Martin Gurri!
The internet diminishes the impact of the prize in yet another way. Take Paul Romer, a highly deserving laureate in economics in 2018. To his credit, many of Romer’s ideas, such as charter cities, had been debated actively on the internet, in blogs and on Twitter and Medium, for at least a decade. Just about everyone who follows such things expected that Romer would win a Nobel Prize, and when he did it felt anticlimactic. In similar fashion, the choice of labor economist David Card (possibly with co-authors) also will feel anticlimactic when it comes, as it likely will.
Card with co-authors, by the way, is my prediction for tomorrow.
In recent decades, “racial disparity” has become the central framework for discussing inequities affecting African Americans in the United States. In this usage, disparity refers to the disproportionate statistical representation of some categorically defined populations on average in the distribution of undesirable things—unemployment, low wages, infant mortality, poor education, incarceration, etc. And by corollary logic, such social groupings are also found to be statistically underrepresented in desirable things—wealth, income, educational attainment, etc.
…Identifying disparate treatment or outcomes that correlate with racial difference can be a critical step in validating a complaint. However, the inclination to fixate on such disparities as the only objectionable form of inequality can create perverse political incentives. We devote a great deal of rhetorical and analytic energy to the project of determining just which groups, or population categories, suffer or have suffered the worst. Cynics have sometimes referred to this brand of what we might term political one-downsmanship as the “oppression Olympics”—a contest in which groups that have attained or are vying for legal protection effectively compete for the moral or cultural authority that comes with the designation of most victimized.
Even short of that cynical view, a central focus on group-level disparities can lead to mistaken diagnoses of the sources and character of the manifest inequalities it identifies.
Hawtrey came from a family long associated with Eton, where he was educated himself, before coming up to Trinity in 1898. In 1901 he was 19th Wrangler; in 1903 he briefly entered the Admiralty, before going to the Treasury, where he found his vocation as an economist and remained for forty-one years. He was a very faithful Apostle, attending every annual dinner until 1954, when he was prevented from going by ill health. He was devoted to Moore, whose impassioned singing of Die Beiden Grenadiere made him realize how horrible war was for the soldiers who actually did the fighting: this constituted an epiphany for Hawtrey, and reinforced his life-long Liberalism. Moore was so much the most important influence on the life and career of Sir Ralph Hawtrey that he spent his last years working on a systematic philosophical treatise (inspired also by Robin Mayor), which was to have been a summa of his twenty-odd books and the hundreds of letters he published in The Times. He was married to the famous pianist Titi d’Aranyi.
That is from Paul Levy’s book Moore: G.E. Moore and the Cambridge Apostles. Here is more on Titi, also known as Hortense, who studied with Bartok and received numerous letters from him. And here is Scott Sumner on Hawtrey, one of the great monetary economists.
This paper studies the heterogeneous impacts of the US-China trade war through linkages in global value chains. By building a two-stage, multi-country, multi-sector general equilibrium model, this paper discusses how imports tariffs effect domestic producers through internal linkage within industry and external linkage across industries. The model validates that imports tariffs on Chinese upstream intermediate goods negatively affects US downstream exports, outputs and employment. Effects are strong in the US industries that rely much on targeted Chinese intermediate goods. In addition, this paper differentiates the impacts of the two rounds of the trade war by comparing tariffs on intermediate goods and consumption goods. This paper estimates that the trade war increases US CPI by 0.09% in the first round and 0.22% in the second round. Finally, this paper studies the welfare effects of the trade war. This paper estimates that the trade war costs China $35.2 billion, or 0.29% GDP, costs US $15.6 billion, or 0.08% GDP, and benefits Vietnam by $402.8 million, or 0.18% GDP.
That is by Yang Zhou of the University of Minnesota, via the excellent Kevin Lewis. Those numbers should not come as a surprise, they do indicate that both countries are worse off, but they also show that a lot of the bargaining power does in fact reside on the side of the United States.
For a short time the Brazilian city of Manaus, in the heart of the Amazon rainforest, offered a glimmer of hope in the search for herd immunity from Covid-19.
After a devastating wave in May killed about 3,400 people and infected many more, the prevalence of the virus subsided rapidly, leading some scientists to theorise that the city of 2m had reached a form of collective immunity.
That hypothesis is now in doubt as a resurgence in cases in Manaus poses fresh challenges to the authorities and difficult questions for the scientists and policymakers worldwide who have been edging towards herd immunity policies as an alternative to harsh lockdowns.
“How do you explain the number of [daily] deaths being in the 30s yesterday and the 50s today?” said Arthur Virgilio, the mayor of Manaus. “What has caused the death rate in Manaus to increase?”
Here is more from the Financial Times.
3. In case you had forgotten this ongoing story: “By Thursday evening’s fourth round the 29-year-old from Oslo had extended his world record unbeaten streak to 125 games, with his last defeat coming in July 2018.”
4. Which 21st century works will merit a close reading or rereading in 2050? I tend to think virtually everything will be superseded, but I mean that as praise for what is to come, not pessimism about current work.
6. Further results on falling mortality rates and diminishing viral load. The broad upshot is that diminishing viral load seems to be more important than we had thought, and a variety of other factors less important.
Reason has released the first of a four part series on the hi-tech Hayekians and the cypherpunk movement. As Tyler already mentioned, Don Lavoie at GMU played an early role in bringing economics and computer scientists together. I was at a few of the first seminars with Lavoie and people like Mark Miller, although it took decades for me to realize how far Lavoie was ahead of his time.
I do not feel qualified to have an opinion here, but this piece, by Benjamin Y. Hayden and Yael Niv, seems of some interest:
Much of traditional neuroeconomics proceeds from the hypothesis that value is reified in the brain, that is, that there are neurons or brain regions whose responses serve the discrete purpose of encoding value. This hypothesis is supported by the finding that the activity of many neurons and brain regions covaries with subjective value as estimated in specific tasks. Here we consider an alternative: that value is not represented in the brain. This idea is motivated by close consideration of the economic concept of value, which places important epistemic constraints on our ability to identify its neural basis. It is also motivated by the behavioral economics literature, especially work on heuristics. Finally, it is buoyed by recent neural and behavioral findings regarding how animals and humans learn to choose between options. In light of our hypothesis, we critically reevaluate putative neural evidence for the representation of value, and explore an alternative: that brains directly learn action policies. We delineate how this alternative can provide a robust account of behavior that concords with existing empirical data.
Via Benjamin Lyons.
This study evaluates evidence pertaining to popular narratives explaining the American public’s support for Donald J. Trump in the 2016 presidential election. First, using unique representative probability samples of the American public, tracking the same individuals from 2012 to 2016, I examine the “left behind” thesis (that is, the theory that those who lost jobs or experienced stagnant wages due to the loss of manufacturing jobs punished the incumbent party for their economic misfortunes). Second, I consider the possibility that status threat felt by the dwindling proportion of traditionally high-status Americans (i.e., whites, Christians, and men) as well as by those who perceive America’s global dominance as threatened combined to increase support for the candidate who emphasized reestablishing status hierarchies of the past. Results do not support an interpretation of the election based on pocketbook economic concerns. Instead, the shorter relative distance of people’s own views from the Republican candidate on trade and China corresponded to greater mass support for Trump in 2016 relative to Mitt Romney in 2012. Candidate preferences in 2016 reflected increasing anxiety among high-status groups rather than complaints about past treatment among low-status groups. Both growing domestic racial diversity and globalization contributed to a sense that white Americans are under siege by these engines of change.
Here is the article, by Diana C. Mutz, via someone on Twitter whom I have forgotten!
Nancy Pelosi warned that a Covid-19 vaccine should not be authorised for use in the US based on data from British trials, amid fears that the Trump administration is planning to rush out an inoculation before election day.
The Democratic speaker of the House of Representatives on Friday cast doubt on the British system for testing and approving medicines, further politicising the race to develop a vaccine for Covid-19.
“We need to be very careful about what happens in the UK. We have very stringent rules in terms of the Food and Drug Administration here, about the number of clinical trials, the timing, the number of people and all the rest,” Ms Pelosi told reporters in Washington.