By Douglas Clement
With new offices and faculty members, the Department of Economics is preparing for the future
Capital and labor, factors critical to economic growth, are also vital to the development of an economics department, and in the past two years, the Department of Economics has benefited from major additions of both. In June 2007, 10 new faculty members were hired, and in May 2008 the department moved into a brand-new building, Hanson Hall. The changes are dramatic -- an economist might refer to them as "positive shocks." By rejuvenating research and reviving infrastructure, they've injected fresh ideas and personalities, created new patterns of interaction, and enhanced the department's long-term potential. In this issue of Minnesota Economics, we report on these changes with profiles of some of the new economists and a description of the new building.
The Next GenerationNew faculty hires will shape the department's future
Our 10 new faculty members have come from as far away as Hong Kong and as nearby as the Federal Reserve Bank of Minneapolis. Joining an established faculty of 14, they've boosted the department's size significantly and deepened its coverage of specialties within both micro- and macroeconomics. Most importantly, they represent a significant pool of new talent that will shape the department's future.
"These people are brilliant scholars," says Larry Jones, department chair, "and we're extremely fortunate that they chose Minnesota. And though they've been here just a year, it's clear that they're bringing new energy and, ultimately, a new identity to the department. They set the stage for the next generation of great economists at Minnesota."
Here are in-depth profiles of a random sample of: one full professor, two associates, and two assistants.
José-Víctor Ríos-RullCarlson Chair
"I do different things," says José-Víctor Ríos-Rull, by way of understatement. Ríos, the Carlson Professor of Economics, is a macroeconomist whose work ranges from monetary policy to the economic impact of divorce, from high theory to pure data.
His first major paper extended general equilibrium models to "island" economies -- very high theory. But early on he was using data to test theory, a hallmark of later work. A 1993 paper, for example, developed a model of skill acquisition that matched U.S. wage data. That contributed to a later paper that explained inequality by looking at how new technology rewards skilled labor.
Currently, Ríos is building a model of fluctuations in housing prices. "So far," he says, "economists have been only very moderately successful in generating oscillations in housing prices -- that is, our models move prices by much less than we see in the data."
Ríos is also studying consumer debt. Individuals often have longterm contracts with banks, he notes, and regulations play a major role in determining the nature of that relationship. "I want to understand the nature of credit," says Ríos, "and take seriously the legal environment in which lenders and borrowers live."
Similar dynamics enter Ríos's research on optimal fiscal policy when policy makers are inconsistent. "What would be the best policy even if it were inconsistent, which typically it is?" Ríos asks. "One goal of this research is to understand what are the best types of institutions under which policy makers can act to yield best results."
Another theme is "trying to bring to macroeconomics the notion that people live in families," Ríos says. Typically, economists model individual "agents," but most individuals live in families, and family structure has significant economic consequences. "We have found that things like divorce are a lot more important to loss of [economic] well-being than unemployment," Ríos says "We should incorporate the details of families into our macro models."
A 1990 Minnesota Ph.D., Ríos taught at the University of Pennsylvania for most of his career before returning here in 2007. "It's a very, very good environment here, with a large number of people who share the same view of how to do economics, which is to use theory and data jointly," Ríos says. And at Minnesota, as in Ríos' models, family is important: "There's also a sense of community here, a sense of engagement, that makes it very rewarding."
Amil PetrinAssociate Professor (with tenure)
Though the minivan is often mocked, its benefits for the average family are undeniable. But how would you quantify those benefits? Amil Petrin, whose specialty is industrial organization, has done just that by using innovative techniques that augment sales data with information about consumer demographics and product purchases. His conclusion: "Overall gains from minivan introduction were large" -- about $2.9 billion over five years, most accruing to consumers and some to Chrysler, the innovator.
Using similar techniques, Petrin later measured gains from introduction of broadcast satellite TV, in competition with cable TV. Satellite buyer gains tallied around $2.5 billion from the new product, he calculated, and cable subscriber benefits totaled $3 billion because their service improved when it was faced with competition.
The minivan and satellite TV research exemplify Petrin's focus on how innovation improves welfare. "One important question is trying to understand how beneficial it is to live in an economic environment where new goods are encouraged," he says. "How do we quantify those benefits so we understand how important that mechanism is for growth, for making us better off?"
With their spotlight on consumer goods, these examples are the most accessible examples of his research, but Petrin's work is wideranging. "A lot of what I do is, broadly speaking, taking newly available micro-level data sets and thinking about how they change the way we analyze very traditional problems in economics."
A good example is a paper he presented recently at the Federal Reserve Bank of Minneapolis on using plant-level data to measure aggregate productivity growth. "That was fun," Petrin recalls. "The micro guy explaining something to the macro guys for the first time -- that was interesting." Macroeconomists have long been interested in productivity, but quantifying it is difficult. Petrin's research uses microeconomic data to determine the macroeconomic variable.
For Petrin, who got his Ph.D. in 1998 from the University of Michigan and then taught at the University of Chicago, that's part of Minnesota's appeal. "Chicago has a great crowd, but Minnesota has a very particular orientation," he notes. "For example, I don't usually talk to macroeconomists, but macroeconomists here are very much of the spirit, 'let's build everything up from the micro level' That's a fabulous environment for serious quality work that's based on microfoundations. It's a perfect match for me -- if you look at my work, really, that's all I do."
Kim-Sau ChungAssociate Professor (with tenure)
Though they never worked together, Kim-Sau Chung is a protégé of Leo Hurwicz. His research focuses on designing mechanisms that result in specific outcomes, precisely the field that Hurwicz pioneered. Chung is now expanding the field to affirmative action, auctions, constitutional law, and even pet insurance.
Chung has recast affirmative action policies in the language of mechanism design and developed mechanisms to better achieve affirmative action goals. One of his first published pieces -- in the American Economic Review, no less -- looked at role models and affirmative action.
He has also applied mechanism design to auctions where the auctioneer anticipates that bidders will collude, and also to auctions where bidders' valuations are interdependent.
Currently, Chung is working on what he calls "awareness of unawareness." "Consider, for example, contracting parties faced with a vast number of unknown unknowns," he writes. "They may choose to write incomplete contracts" to retain flexibility for unforeseen contingencies.
Applying this thinking to constitutional law, Chung asks whether legislators should enumerate specific rights. "Would doing so send a wrong message to future supreme courts" that other rights could be abridged? Perhaps legislators should say the initial list of rights is not exhaustive. "Would that help?" asks Chung. "This is a new design question. My current work is to develop the formal tools needed to analyze these kinds of questions."
Pet insurance? The frivolous example is Chung's way to clarify a complex notion. "A typical pet insurance contract will contain many funny-sounding pet disease names that you have no clue about," he explains. "But you're fully aware of your ignorance, and you're aware that the insurance company is also aware of your ignorance. How are you going to protect yourself?" Chung communicates the abstruse through the commonplace.
A native of Hong Kong, Chung received his Ph.D. in 1999 from the University of Wisconsin-Madison. He taught at Northwestern University for seven years, then at the University of Hong Kong for one year before returning to the United States to work at the University of Minnesota.
Minnesota provides opportunity to collaborate closely with others in his field -- some of his work is linked to Aldo Rustichini's, for example. But he points out that Minnesota economists have a broad embrace. "Economists at Minnesota aspire to be Renaissance men and women," Chung observes. "My Minnesota colleagues attend seminars far from their own fields, apparently purely for the seminars' consumption instead of production values."
Min Jung ParkAssociate Professor
Minjung Park understands better than most the benefits of wireless number portability (the option to kept the same phone number when one switches cell phone carriers). Her Ph.D. dissertation analyzed price response of wireless carriers to the government's 2003 portability requirement and found that reducing consumer switching costs increased competition and substantially lowered prices.
But Park also found evidence of price discrimination. Prices in low-usage plans decreased just 50 cents a month, while medium- and large-usage plans decreased $3.30 and $8, respectively. This suggests that portability induced more competition for higher-volume users, since their high switching costs (informing large social networks of the number change) were eliminated.
The portability study is a perfect example of Park's innovative research. "I am mainly interested in empirically investigating how firm behavior responds to various types of incentives," says Park. "The incentives could come from regulation or consumer behavior. From theory I borrow economic insights ... and [then I] perform empirical analysis to test the ideas."
Park has also investigated mergers and acquisitions in the mutual fund industry. Using data on acquisitions from 1991 to 2004, she tests two hypotheses: (1) some firms pursue acquisitions that don't maximize profits, and (2) targets avoid acquisition by such firms. "The idea here," says Park, "is to view the merger market as a matching game between potential acquiring firms and potential targets, and to apply the matching model to understand motives." Here again Park finds support for her hypotheses.
Recently she analyzed how mutual fund advertising is influenced by consumers' advertising elasticity. Her findings suggest that large firms have an incentive to escalate spending on advertising in a growing market and that that limits industry fragmentation in the no-load segment of the fund industry.
A native of South Korea, Park received her Ph.D. in September 2007 from Stanford University, where University of Minnesota economists Narayana Kocherlakota and Pat Bajari recognized her talent. The Minnesota economics department appeals to her because of the intense faculty member engagement. "The most attractive feature for me as a junior faculty is that people here interact a lot intellectually," she says. "People are interested in what their colleagues are working on, love to debate research ideas, and also are eager to learn from each other, even when they are in different fields. This makes Minnesota an intellectually exciting and challenging place."
Itai SherAssociate Professor
The titles of Itai Sher's research papers are simple. "Persuasion and Limited Communication," for example. Or his master's thesis: "Games with Misconceptions."
Don't be fooled. Though he writes with a clarity that is rare in economics, his work is intimidating in its technical sophistication. In one paper, the phrase "it is easy to see that" is preceded by long equations of numbing complexity. Mathematical abstraction is inherent to his specialty, game theory, which analyzes strategic interaction among players, so it's a blessing to nonmathematicians that his writing is so lucid.
An example? "Persuasion is important in a wide array of political and economic environments," he writes in a recent paper. "People often argue over the best course of action, or attempt to persuade others that their own personal desires are really best for everyone. But what makes an argument persuasive?" The next 47 pages -- including 16 theorems, 11 lemmas and proofs thereof -- explore that question.
In his research, Sher looks at communication in which party tries to persuade a decision maker to take a particular action. "For instance, the informed party may be a lobbyist and the decision maker may be a legislator," he explains. "My research addresses the question of how the decision maker should elicit information from the informed party, and in particular the role and value of commitment in such interactions."
Sher is interested in auction theory, too, specifically "combinatorial" auctions where bidders can bid on packages of items. He's also exploring "boundedly-rational decision making," which is to say, the process that most humans engage in. Unlike most economists, who study math, engineering, or economics as undergraduates, Sher was a philosophy major, and his interests reflect that.
Why is Sher at Minnesota? "Because research is taken so seriously here," he says. "Let me give you an example." In January 2007, his Ph.D. from Northwestern almost in hand, Sher endured job market interviews at the American Economics Association annual meeting -- a rite of passage for grad students. "Only at Minnesota's interview was I asked to rigorously present the assumptions and details of my model," he recalls. "Minnesota was the only school that actually had a whiteboard that would allow one to write down equations and derive conclusions."
His equations were impressive. Minnesota made an offer. "And since I have been here" he says "that seriousness about and enthusiasm for economic research has been constantly in evidence."
Economics Finds a New HomeAfter nearly a century in Heller Hall , the department has moved to the newest building on campus
In mid-May, the Department of Economics moved to the 21st century.
After 47 years in Heller Hall, the papers, books, students, and staff and faculty members that constitute one of the nation's top economics departments found a new home in a brand new building, Hanson Hall. And though the departments new home and old home are less than a three-minute walk from one another, in comfort, space, and energy the old and new homes are worlds apart.
Previously scattered across four stories of Heller, the department is now situated on the top two floors of Hanson, with nearly 3,000 additional square feet of badly needed space. Light fills the offices. Ventilation is good. Equipment works. And a Starbucks is, literally, next door.
The move was made possible through the grace and generosity of former economics student Herbert M. Hanson, Jr. (B.A.,'49), who with his wife, Barbara, pledged $10 million to the Carlson School of Management (CSOM) in 2004. (Hanson, the retired founder of San Francisco -- based Hanson Investment Management, had earlier endowed a CSOM chair in honor of the late economics professor Arthur R. Upgren.)
The MoveCSOM collaborated with the College of Liberal Arts in creating space for the department. The move began in May, with crate upon crate, dolly after dolly of old research papers, books, and office equipment making their way a few blocks south. "Write a story about room 141," said a mover to a reporter as he carried the last of Ket Richter's 63 banker's boxes into the professor's new office.
Faculty offices, seminar and conference rooms, a lounge and kitchen, and the department's main office are on the fourth floor. Hanson's third floor is dedicated to the department's students, with the research library, classroom, computer lab and graduate student offices housed on the same level.
Hanson's modern infrastructure is a major advance over facilities in Heller, which was built in 1961. The seminar and conference rooms are fully wired for audio, visual, and Internet. Natural and artificial light are plentiful. No harsh cinder block. Desks are new. Chairs have wheels. The computer lab, though windowless, is state-of-the-art.
Dedicated SpaceBut the major leap forward is in sheer space. Faculty offices are about 20 percent larger than at Heller, according to Sara Shuford, assistant to the department chair. "And graduate students now have offices in rooms with 4 to 5 workstations compared to some previous arrangements of 12 to 13 per office when we were at Heller."
Even better, the department now enjoys dedicated space. "At Heller, we had problems. You'd want to schedule Ph.D. orals and you couldn't get rooms because it's so crowded on the West Bank," says department chair Larry Jones. "At Hanson, we've got our own, and it makes a world of difference. We can now hold staff meetings, seminars, and other informal gatherings when and where we need them."
In fact, with the recent faculty expansion, the old meeting rooms at Heller "weren't really big enough anymore," says Jones. "When there were fewer of us, it was crowded but okay. With this larger group it would have been unwieldy to have any kind of discussion. Now there's plenty of room to have department meetings or classes."
Growing PainsThere are, to be sure, transitional glitches. Desks had to be raised to accommodate Kehoe knees. Office manager Caty Bach says her eyes are still adjusting to all the light that pours through the western windows of the central office. Jones is thinking about ways to facilitate contact between faculty and students now that each is concentrated on separate floors. And a wry note penciled on paper above an office door -- "Chipotle 1st Year Grad Students"-- may mark the beginning of a spirited exchange with the department's new neighbors, the Carlson School of Management and its ubiquitous corporate sponsors.
As autumn returns and students fill the classrooms, as equations cover whiteboards and computers test models, the disruptions will smooth into routines, new patterns will take hold, and the department will find itself at home again.