Esther Duflo

I first met Prof. Duflo in 2004 when I was a student at the Harvard Kennedy School. She came as a guest lecture in our seminar series. She presented her work on the impact of a quota for female politician in India's local government.

During my two-year time in Cambridge I hadn't had too much opportunity to interact with her. But I learned much about her works and MIT-based Poverty Action Lab, the organization he leads with Abhijit Banerjee and Racherl Glennerster. Her most cited work was, of course, her dissertation-turn-seminal paper on measuring the return on education using Indonesian data. In the paper, she exploited the fact the SD INPRES policy in the 1970s could serve as a exogenous quasi-experiment. By comparing the average years of education and wages between the pre- and post-INPRES cohorts, she corrected the endogeneity and omitted variable biases.

In 2008 I had a privilege to get involved as one of the te aching assistants in the Poverty Action Lab's short course in Bali. There I had some chance to discuss some technicalities in doing randomized experiment studies with her and her co-workers. I also learned that she likes to go hiking and mountain climbing. In fact, after the Bali course finished, she and Pascaline Dupas went to Lombok to climb Rinjani.

This week the American Economist Association awarded her the John Bates Clark Medal (see the story here and here). It is a highly prestigious award, given every 2 years to "American economist under 40 who have had a significant contribution to economic thought and knowledge." (Note: Prof. Duflo is now 37). Former medalists include Milton Friedman, Joseph Stiglitz, Paul Krugman, and recently Steven Levitt, Daron Acemoglu and Susan Athey. Duflo is the only second medalist after Susan Athey. And in the past, Clark Medal is a good predictor for winning the Nobel Prize.

Prof. Duflo had her Ph.D from MIT, and has been working there since then. In the US academic job market (in economics), it is very unusual for a Ph.D to work in the same institution immediately.

If I can summarize her contribution, it will be 'helping to understand which development policy or initiative work, and measure the impact, using randomized experiments.' True, there has been so many debates over the use of randomized experiments. The fact that is has been debated only shows its importance. Although Prof. Duflo was not the inventor of the technique, she and her co-workers are the ones to make it popular not only among academia, but also for policy makers and pracitioners.

For those who have always been skeptical, even hostile, to economics and economists, please spare some time to take a look at her and the Lab's website, and see how diverse the discipline has been.

And The Medal Goes To

Esther Duflo of MIT. She obviously very well deserves for the medal indeed. Congratulation.

Your barista Ape, her fellow randomista, will probably serve you a review on what Prof. Duflo has done and brought her to the prestigious John Bates Clark Medal.

Torture of Book Sale

I am at my local library now and could not decide what to buy from their ridiculously low-priced ongoing book sale: Goethe's The Sorrows of Young Werther, Carlos Fuentes' A New Time for Mexico, or Toni Morisson's Sula.

One thing I know I won't take is anything from Michael Moore.

I think I'll go for Goethe.

Update: Goethe's Werther has gone. No wonder, it costs just 50 cents.

Who Wants Industrial Policy?

Dani Rodrik of HKS is one - with some twist from the old definition.

Nonetheless he said:

The standard rap against industrial policy is that governments cannot pick winners. Of course they can’t, but that is largely irrelevant. What determines success in industrial policy is not the ability to pick winners, but the capacity to let the losers go – a much less demanding requirement.

Uhm, I am not convinced. Letting the losers go is very hard, and probably equally demanding with picking winners. I made a serving in this Cafe sometime ago, arguing that old policies don't simply die.

Which books?

Dear Kate,

I'm off to Kelapa Gading today. The Gramedia there runs a handsome price discount. Any suggestion on books?

Thank,
Bookbuff @ Karet

Dear Bookbuff,

First, forgive me that I doubt you're a book buff. Book buffs don't ask suggestion on books. They know what they want.

But I'd tell you anyway what I just did in my latest shopping spree. I bought SuperFreakonomics (Levitt-Dubner), Nudge (Thaler-Sunstein), Animal Spirits (Akerlof-Shiller), The Return of the Great Depression (Krugman), and The White Tiger (Adiga). All but Tiger are with econophone, but Tiger is equally entertaining - it's the winner of 2008 Man Booker Prize. My usual formula in bookshopping is 4:1, four econ and one literary work.

Oh, while we're at it, why don't I share with you what I would not buy? Here goes. I don't buy books of authors who put their academic titles on the front cover. They're usually bad bad bad. I don't trust self-help books. And I don't like books with dry title.

Finally, I also judge books by their cover. And sometimes I buy books just for the sake of ridiculing them: John Perkins, Naomi Klein to name two.

Happy shopping,
Kate

For Auction: Freshman Seats

Greg Mankiw told us that Harvard admission committee has decided to auction off 100 freshman seats for the next academic year to overcome their budget shortage.

Of course, you may want to be little bit careful in reading the date of such announcement.

On the second thought, the idea is not as outlandish at it may seem. What about the FEUI follows the suit and would launch an open auction for, say, 30 seats next year -- and use the money to buy books for library and send their junior lecturer to study abroad?

I think it is a good idea as long as they make it open and transparent. On a smaller scale, they can try to auction off seats in Aco's class -- I wonder how much the true market value of his lectures is :-D

What do you think?

Pricing the environment

Dear Kate,

I gather, you took a minor in environmental economics. I once heard that you guys like to value clean air, healthy water, sequestered carbon etc by putting a price on them. How do you do that?

TreeHugger @ Borneo


Dear TreeHugger,

There are many ways to do that. Let me take one here, called hedonic price estimation. You are Foke that governor. Suppose you want to clean the Jakarta's air. Calculating the cost is easy: sum up the prices of labor, equipments, capital, etc. But you would need an estimate of benefit. After all, you can only approve a project when its benefit outweigh the cost - especially because you're using public money from the taxpayers, you would be held accountable. Measuring the benefit of cleaner air is not straightforward, because air is not market good ie it doesn't have a price tag ready like the t-shirt you buy in Plasa Senayan.

This is where hedonics comes into rescue (I'll tell you someday why it is called 'hedonic' approach). It measures the benefit of non-market good via the price of a market good. How? Think about the time when you were about to buy your house. What were your factors of consideration? Of course you would care about its price, its structure, its location, its neighborhood. But you also care about the environment, the air right? With only price and environment vary, other things being the same, which one would you buy: House A, cheaper but with dirtier air, or House B, more expensive with cleaner air? Keep in mind, life is about choosing and tradeoffs.

That is what hedonic approach exploits. It tries to extract the environmental part in your set of consideration when you buy a house. Using an advance econometric approach, you set all variables but price and an environmental proxy unchanged. Then you can see what a change in environmental variable would impact on the house price. Then you multiply this number by the population house in the area. This is the social benefit of having clean air in Jakarta.

You want more? Ahem, hire me :)

Greeny yours,
Kate

Twitter

Hi, I'm officially on Twitter now (@katesalemba). As in the other social networkings, I'm a latecomer. I gather, the baristas are there too: Aco (@acopatunru), Ape (@ari_perdana), and Ujang (@ujangw). Rizal is still in denial, while Sjamsu 'can not handle one more additional networking' (what, is he Paris Hilton or something? Haha).

So, let's see how this Twitterati plays out. Wanna bet how long I'll be ... what's the term, tweeting?

Twittery yours,
Kate

Gary Becker's World View -or Something Like That

One feature I like from Chicago political-economy school is their optimistic view on market-like competition and the ability of people to generate it --regardless of any (usually government) attempt to suppress such competition.

Gary Becker interview here is one example. Unlike the right-wing radicals who saw the passing of healthcare bill as a doomsday for America, Becker remains rather optimistic that voters as well as competing interest groups generally would place more realistic assessment and control on this political and politicians' product.

I share his view on the role of interest groups competition - including on the latest Pansus brouhaha.

My favorite lines, however, is his explanation on people's anti-market bias. Becker says at ease:

"There's one bias that we're up against all the time: Markets are hard to appreciate. People tend to impute good motives to government. And if you assume that government officials are well meaning, then you also tend to assume that government officials always act on behalf of the greater good. People understand that entrepreneurs and investors by contrast just try to make money, not act on behalf of the greater good. And they have trouble seeing how this pursuit of profits can lift the general standard of living. The idea is too counterintuitive. So we're always up against a kind of in-built suspicion of markets. There's always a temptation to believe that markets succeed by looting the unfortunate."

Yes, indeed market is hard to appreciate - mostly based on appeal to emotion.

Akerlof and Kranton's Identity Economics

Do economists simply disregard social norm in their analysis?

Contrary to common belief, economists have tried to incorporate social norms in at least three ways. First, in collaboration with psychologists, they tried to model an agent's maximizing utility behavior with additional constraint of psychological bias. Second, they also tried to take into account other's utility function into the representative agent's utility function; known as endogenous preference approach.

This first two approaches still hold up a single representative agent behavior as micro-foundation of a social phenomena.

Akerlof and Kranton, in their latest book, Identity Economics, 2010, offer a different perspective. They use more than one representative agent and respective utility function (they called it identities) in looking at a certain social pattern.

I have read this interesting and readable book for the general public, but haven't had time to peruse the more technical academic journal articles behind this book --those on the bibliography. With that in mind, this is my knee-jerk reaction: how do we decide the number of agents' types and utility functions we need to put into account in analyzing, say, gender and labor market in Indonesia? Two, three, four? What is the general rule for determining that number?

Nevertheless, the book shows that economics, after all, has never been an isolated subject full with stubborn students. It did not stop with Milton Friedman's book on Price Theory.