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Teaching

My passion for teaching has been a part of my journey since 2015. My teaching experience centers around mathematics and microeconomics. I firmly believe in making theoretical concepts come alive. To achieve this, I consistently connect them to real-world events, such as current news, history, business and policy scenarios. For more on my teaching evaluations, click here. For a glimpse into the examples I use in the classroom, please explore the materials below. If you want to know more about my teaching evaluations, click here.

Why was thesoviet spaceshuttle better?

Employee: If we restructure the front-end, the back-end will become faster and it will require less maintenance.

Boss: So you're telling me to spend my team’s time and budget to save the back-end team’s time and budget?

Employee: Well… we will still be saving the company money overall.

Boss: No, that's not technically feasible.”

​Economics isn’t always about stocks and market predictions. When I mention I'm an economist, I'm usually bombarded with questions about inflation, the next recession, investment strategies, and the impact of automation on jobs. While these are undoubtedly economic subjects, the field of economics delves into so much more. Economic research often touches on areas people might initially think belong to other domains: discrimination, voter behavior, marriage dynamics, teenage pregnancy, and crime, to name a few. And guess what? Even space shuttles! The beauty of economics is its interdisciplinary nature; while we learn from other fields, many disciplines adopt our analytical techniques. So, what's the essence of economics? At its core, economics seeks a quantitative understanding of constrained choices. It might sound technical, but here’s a simpler example: When shopping at Walmart, you have a limited budget to spend. You try to make the best out of  your money. Discounts might make you reconsider your choices. But constraints aren't just financial. Time is a limited resource too. Balancing the time you work, exercise, and watch Netflix is an everyday economic decision. Similarly, politicians juggle their limited political capital. They cannot engage voters and allies for every single idea they have. Here's the crux: Our decisions are shaped by the constraints and incentives before us. Consider job applications. The effort and time might not seem worth it if the chance of landing the job is slim. But, if there’s a high probability of success, we're more likely to take the plunge. This interplay of costs, benefits, and incentives is foundational to every decision we make. In the 1980s, the Soviet Union launched the Buran-class orbiters, comparable to the American space shuttle. These orbiters, propelled by the expendable Energia rocket, were marvels of their time. Unlike the American versions, Buran orbiters could operate remotely and boasted a state-of-the-art automatic flight and landing system. Their rocket boosters, which used liquid fuel, could be modulated during flight, unlike the solid-fueled boosters of the American shuttles, offering superior safety. However, the Buran came with a heftier price tag. It flew only once and, post-Soviet dissolution, was left in storage until its tragic end beneath a collapsing building due to the lack of maintenance. One might wonder, why didn't the U.S. try to outdo the Soviets? Why did the Soviets invest so much in such advanced technology, only to abandon it? It's a matter of decision-making, resource limitations, and, you guessed it, incentives. U.S. presidents, aiming for reelection and needing to bolster their party’s reputation, must allocate the finite budget wisely. Spending more on space might mean less for education, infrastructure, or subsidies – vital sectors for maintaining voter support. The Soviet leadership, on the other hand, faced a different set of incentives. Gaining favor within the Politburo or military might have trumped mass popularity. Leaders, wherever they are, respond to their unique incentive structures. As economists, our task is to decipher these incentives and predict decisions, whether they concern shopping at Walmart, who to marry, or space shuttle designs.

For a deeper dive into the tale of Buran, check out this video:

Will AI takeour jobs?

Scientist: "We'll know artificial intelligence has reached human-level consciousness when it starts littering, posting mean comments on social media, complaining about its spouse and experiencing road rage.”

The anxiety surrounding technology replacing workers is not new. My first time reading about this topic was in 2016, but economists have been researching the topic for decades now. With the emergence of innovations like ChatGPT and AI-generated art, concerns have regained momentum.

While the widely available AI is a relatively recent phenomenon, history offers interesting parallels. The agricultural and industrial revolutions are the most prominent examples. The advent of agriculture and animal husbandry meant producing the same quantity of food with fewer hands and less effort. Similarly, the industrial revolution allowed items once meticulously crafted by artisans over long hours to be mass-produced using fewer resources and labor. However, these changes did not create generations of jobless artisans and hunters. Instead, new workers were reallocated to emerging sectors of the economy. Another parallel can be drawn with outsourcing. Just as AI can be viewed as a cost-effective means of production, so too can employing cheaper labor overseas. While outsourcing did disrupt specific professions, it allowed for new jobs to be created in other activities.

Yet, even with these historical parallels, we still imagine a world with a "perfect AI" — a hypothetical scenario where machines are better than us at absolutely everything. Would our historical analogies still apply in such a context? Economists label this a severe form of "capital-biased technological change." In that case, even though automation would increase productivity, these gains would be concentrated in the hands of capital owners, i.e. essentially those who own these advanced AI systems. Echoing this sentiment, renowned economist Leontief posited, "Any worker who now performs his task by following specific instructions can, in principle, be replaced by a machine. This means that the role of humans as the most important factor of production is bound to diminish—in the same way that the role of horses in agricultural production was first diminished and then eliminated by the introduction of tractors."

Another prominent economist, Keynes, argued in his 1930 essay (link) that technology could potential eradicate material scarcity. He analyzed the trajectory  of productivity growth, hypothesizing that we might  eventually work fewer hours.

 

While there's evidence to suggest that productivity has indeed surged, our work hours have not notably decreased. Stagnant real wages for middle-class families seem to suggest that we are  moving towards the “perfect AI” dystopia,

rather than the world Keynes envisioned.

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David Autor stands out for his empirical studies on this subject. In one notable research piece (link), he delved into specific tasks that have been automated over time. For example, the proliferation of PCs in the 80s significantly reduced the demand for typists. Similarly, the introduction of ATMs lessened the reliance on human tellers and cashiers. Yet, not all roles faced decline; creative and managerial tasks witnessed a boost in productivity. This liberation from routine tasks enabled creative work to be more productive, increasing wages. However, Autor's findings suggested a growing polarization in the labor market: high-skilled professions enjoying increased earnings, while low-skilled jobs experienced a dip.

While stagnant wages and rising inequality are undeniable trends, we do not observe mass unemployment. On the other hand, recently there's been a noticeable deceleration in productivity growth. Therefore, we cannot rule out other factors as the drivers of rising inequality. Even though automation results in fewer human interventions for specific tasks, it simultaneously allows new innovative roles and industries (link). Again, a parallel can be drawn with the evolution of agriculture. Instead of working in farm fields, we are becoming digital influencers on platforms like TikTok. Today, entertainment sectors hold a significance that rivals older industries such as food. AI, rather than replacing all workers, might very well be the boost in productivity necessary for increasing real wages.

 

It might seem surprising, but not too long ago, we couldn’t imagine the influence of social media on aspects like politics, advertising, and even dating. Today, an increasing number of children aspire to work at content creation, digital influencing, and marketing analytics among other recent fields. Far from replacing artists, advancements like 3D printing have amplified the scope of their work, allowing them to produce custom and niche products, readily available on platforms like Etsy. Technology and automation can create new tasks, services, and products. The proliferation of such niche markets might well offset potential job losses due to automation (link). Again, the advent of ATMs may indeed have reduced the demand for tellers, but by making the operation of branches more cost-effective, they possibly led to the opening of more branches and consequently, more positions for branch managers.

 

David Autor's insights suggest that while technological advancements may help some professions, they could adversely impact others. Historically, automation predominantly affected low-skilled and blue-collar jobs. However, with the advent of AI, it's plausible that this time effects might predominantly target mid to high-skill office roles. 

 

However, all of these considerations ignore other labor market trends. The global decline in fertility rates, for example, is leading to an aging population, with fewer young individuals entering the workforce and a surge in retirees. Instead of replacing workers, automation might be a tool to address this demographic shift (link). Automation could fill the gap created by aging, ensuring that a reduced number of more productive young workers can balance an increased number of retirees (link). 

 

I would like to draw one last parallel with cooking shows. In the 1980s, the idea of hosting your own cooking show seemed almost unattainable for most people. Fast forward to today, platforms like YouTube, TikTok, and Instagram are full of cooking channels, each targeting a unique niche — be it the history of cooking, outdoor cooking, recreating dishes from TV shows, vegan recipes, or fitness “meal prepping”. Just like with social media and content creators, advancements in AI-generated text, data analysis, illustrations, and music might allow people to explore their creativity. Rather than being replaced by AI, there's potential for collaboration, creativity and unlocking of new objectives. This brings me hope.

Grandpa: Back in my day, you had to swim a 1000 miles just to use the nearest phone.

Grandpa: Netflix? Back in my day, we watched clouds move across the sky for entertainment.

Grandpa: Back in my day you had to wrestle a bison if you wanted a meal.

Grandpa: And if you wanted clean water, you stood in the rain with your mouth open.

Junior: Ok, grandpa, I get it. Things were definitely tougher back then!”

Boomerfoods?

Many foods that were once popular now seem outdated. Think Vienna sausages, bologna, jell-o salads, mayonnaise, spam, and canned fruit. As McArdle suggests in his article link, these shifts in food trends can be explained through economics. He argues that in the 1950s, people relied heavily on preserved foods due to the limited supply chains of the early 20th century. However, with modern advancements, not only do we have fresh local produce, but we can also access fresh goods from other countries. Today, it's not unusual to see Mexican cilantro in US grocery stores, Chilean fruits in Brazilian markets, or Ecuadorian bananas in Western Europe. Foods that once signaled affluence have become everyday staples. McArdle's most interesting example is gelatin. Gelatin was once laboriously crafted from a calf's foot, but later mass-produced as an affordable, long-lasting item. This change in our perception of gelatin is an illustrative example of how items can transition from being "normal goods" to "inferior goods." In the early 19th century, gelatin consumption was restricted to high-income families. By the end of the 19th century, powdered jell-o was being mass produced and today, as our incomes rise, we shift away from jell-o towards more gourmet choices like wagyu. This trend isn’t confined to food. Take the evolution of media: In the 1990s, DVDs and LaserDiscs were normal goods, while VHS tapes were the inferior alternative. By 2006, Blu-ray set the standard, relegating DVDs to the inferior status. Yet today, in the streaming era, LaserDiscs are again normal goods, since they are collector's items, such as the sought-after high-resolution LaserDisc of Star Wars’ original release. But why is this classification so crucial for economists? The distinction between normal and inferior goods has broader implications. As incomes rise, we opt for more of the former and less of the latter, but when incomes fall, the trend reverses. In tough times, such as recessions, retailers like Dollar Tree, which predominantly offer inferior goods, often see a surge in sales. Thus, stocks of inferior-good retailers could be a good option during recessions. Thus, classifying goods as inferior and normal goods is more than taking a derivative with respect to income. It can be helpful, whether you're understanding the culinary choices of your grandmother or determining where to invest.

Why do we likemarkets?

Boss: Spend whatever it takes on this project. Our client doesn't mind the risk of it flopping.

Employee: Who's the client? 

Boss: The taxpayer.”

Should we allow markets and CEOs to decide societies’ trajectories? Why do many economists seem to lean toward an affirmative answer? Do economists turn a blind eye to the issues of inequality, pollution, and other potential pitfalls of capitalism? The short answer is a resounding "no". Economists are actively researching how to address societal challenges. Nonetheless, we are concerned many proposed alternatives to market-driven systems often lack the qualities of markets.

Markets, while greed is a part of markets, they are much more than that. Markets are a communication mechanism, an idea captured perfectly by Read’s famous pencil analogy (link).

The idea behind the pencil allegory is the following: Imagine if our entire economy was controlled by a singular entity, such as the government. To satisfy the needs of the population, the government would have to continuously survey everyone about their needs and capacities, then quantify resources, labor, and capital needed for production. Now, suppose a forest fire reduces wood supplies. The government would need to adjust output for every wood-reliant industry. For instance, it would have to inform the pencil industry to scale down production. Such real-time micromanagement across countless goods and services becomes impractical, if not impossible.

However, in a market system, if a fire reduces wood availability and wood prices surge, consumption naturally decreases. Not because consumers are aware of the fire, but because the higher prices deter them. In essence, prices serve as information carriers, signaling scarcity and directing market behavior. Thus, markets and prices can efficiently dictate what gets produced, how, and for whom.

Economists value production efficiency: producing the most using minimal resources. This ensures more people benefit from the wealth of goods available. Often, this efficiency arises not from regulatory mandates but from producers' pursuit of profit. Being inefficient means higher costs and less profits.  Likewise, market transactions guarantee efficiency. When an Uber driver acquires a car from a non-frequent driver, it’s a win-win: resources are effectively reallocated and both parties benefit. To the Uber driver, that care is worth more than to the original owner. Yet, the price the original owner would accept for the care is still less than what the Uber driver is willing to pay. Both see the transaction as an improvement.

This efficiency and mutual benefit from trade are central to economists' endorsement of markets. But for a deeper understanding of the benefits of trade, we need to look at Production Possibilities Frontiers (PPFs) and comparative advantage. A PPF is a representation of all possible combinations of outputs we can produce with our current resources. This model highlights trade-offs; producing more of one item often requires producing less of another. That is, under a limited resource or time budget you cannot do everything. For example, a student might have to sacrifice an hour of working out to study an extra hour. The "sacrifice rate," which we call opportunity cost, can fluctuate based on context. For instance, the cost (including consequences) of one tequila shot varies considerably depending on whether it's your first or your twenty-first shot.

 

Why are opportunity costs important? Because varying opportunity costs are at the heart of the benefits of specialization and trade. For example, consider a mother, a high-powered CFO, and her child as an example. While the mother is more skilled than her child at any task really, her time spent trading stocks might earn thousands of dollars. So, if she allows her child to handle the dishes, the time saved translates to increased wealth for the family. The opportunity cost of doing dishes is lower for the child, and therefore, the child has a comparative advantage in doing dishes. The child is the one that has the least to lose by doing dishes. This comparative advantage concept extends to labor markets and international trade too. Even if the US were the best at manufacturing all products in existence, focusing on its core strengths and outsourcing other tasks allows for better resource allocation.

For all of that to happen, being able to trade is essential. Market transactions allow specialization and channels information about scarcity without explicit knowledge. People, through practice, experience and intuition, often know how to navigate their professions better than any centralized entity could. Market transactions allow these individuals to use all their skills, experience and knowledge, even when it is inarticulate. This insight was brought to us in the 1945 seminal paper by Nobel laureate Hayek, “The Use of Knowledge in Society” (link). This paper was one of the most cited works of the twentieth century, and its legacy inspires modern economic thought to this day. 

What about capitalist greed? Do markets amplify selfish tendencies, making us more corrupt and debased? Virgil Storr and Ginny Choi tackle this very question in their recent research. They argue that individuals in market-driven societies are not only happier but also more connected to each other. Often markets compel individuals to be trustworthy and hard working simply to sustain their reputation amongst peers, suppliers and customers. Moreover, the logic of market interactions is focused on quality and price, largely sidelining prejudice and personal biases. Much of the equality and sustainability policies are not government policies, but rather companies’ internal policies issued due to the pressure of customers. Therefore, in many ways markets do have the potential to be a moral space. Furthermore, centralized planning by strong governments does not prevent corruption. Quite the opposite: In these cases, officials hold much discretionary power and may misuse them. In that resources might be inefficiently allocated by corruption and not by consensual trading. That’s why economists like markets: because before identifying their limitations, we first understand their strengths.

Don’t watcha bad movie

Father: While playing with my phone, our son accidentally ordered a sandwich with fish, peanut butter, vinegar, chocolate, and brussel sprouts… But since I paid for it, I'm going to eat it.”

Before World War II, commercial air travel was in early stages of development. Crashes were common, and many cities didn't have a dedicated airport. In that context, amphibious aircraft had a strong appeal: they could make use of any sizable body of water as a landing zone. For airlines, these "flying boats" were a strategic choice, laying the groundwork for long-distance networks and routes even with aircraft that had limited range. However, amphibious aircraft had their drawbacks. They were generally heavier, less aerodynamic, and more costly to operate than traditional land planes. By the end of World War II, the aviation landscape underwent drastic changes. The war had prompted the construction of numerous airstrips, and technological advancements in civil aircraft, inspired by wartime bombers, made air travel safer, with more efficient, higher-range planes. Wartime research and development also laid the foundations for commercial jet planes. And yet, in the 1950s, British company Saunders-Roe Limited embarked on an ambitious project: to create the largest flying boat ever. Dubbed the 'Princess,' this enormous plane was designed with opulent dining rooms, movie theaters, and cabins, drawing inspiration from the playbook of luxury transatlantic ships. But here's where the timeline became an issue: while Saunders-Roe was busy with the Princess, other aviation milestones were being achieved. By 1949, the prototype of the DeHavilland Comet, the world's first jetliner, had already taken to the skies. Fast forward to 1958, and Pan Am was operating the Boeing 707, a game-changer for the airline industry. Similarly, the first DC-8 flew in 1958. These planes looked a lot like current industry standards and unlike the Princess, wouldn’t stand out in a modern airport. So, why did Saunders-Roe persist with the Princess when the writing was clearly on the wall? The answer may lie in the realm of economics and incentives. The Princess project was primarily funded by the British Ministry of Supply. Instead of being responsive to the demands of airlines, it was tethered to the inertia of the Ministry’s bureaucracy. The sunk cost fallacy played its part too. Having poured resources into the Princess, there were hopes of benefiting in some way from it, even when it became glaringly obvious that flying boats were relics of a bygone era. That’s where the movie example comes in: Imagine you're watching a movie in a theater. Few minutes later, you realize it's dreadful. Do you stay till the end just because you've paid for the ticket, or do you cut your losses and leave? The price of the ticket, in economic terms, is a 'sunk cost' – it's money you can't get back, whether you endure the entire movie or not. Hence, you’re better off leaving and at least saving your time. Saunders-Roe and the British government fell prey to the sunk cost fallacy, pouring more resources into a project that was doomed from the outset. Of the three Princesses built, two never even experienced the thrill of flight. Naturally, some decisions are complicated. Take, for example, the decision of switching majors as a senior in college. The time and tuition you've invested up to that point are irreversible—these are your sunk costs. Yet, the real consideration lies in weighing the future: Will the potential increase in earnings and job satisfaction from the new major outweigh the additional college years and foregone wages you could make by going on market earlier? This aviation story holds a valuable lesson for all of us: we should periodically reassess our commitments and investments, ensuring we're not pouring our energies into 'flying boats' in our own lives.

And for a deeper dive into the history of the Saunders-Roe Princess, don't miss this video:

          Boss: To increase profits, we need a product that's unique.

Employee: How about my childhood drawings? They're definitely unique. 

Boss: Sure, but we also need something people will actually want.

Evil Cartels orUnique Products?

A common perception is that when two competing products from top brands have strikingly similar prices, there must be some sort of secret agreement or collusion between these companies. Such agreements are called cartels and are usually banned all over the world. Legally, a cartel is any form of secret cooperation among competitors to restrict competition and improve their profit margins. 

In competitive markets, firms try to undercut one another, thereby supplying more products at reduced prices. With cartels, however, production is restricted on purpose. Smaller outputs lead to higher prices and increased profits. But how can we differentiate between genuine competition and collusion without recordings or screenshots of CEOs secretly colluding?

 

In fact, economics and statistics give us instruments to figure that out. To understand these tools, we need to look at different forms of competition. Take, for instance, two identical products offered at different prices, like two bags of rice. Most consumers will naturally gravitate towards the cheaper option. However, if one of the bags contains organic rice, we cannot say for sure which one consumers will choose. This brings us to the concept of product differentiation.

 

Products, even if they belong to the same category, often have unique characteristics or selling points that lead to brand loyalty and prevent them from being easily replaced. Such differentiation means that differences in price may not be enough to persuade consumers to opt for the cheaper product. The cereal market is a very interesting example. For instance, fans of Trix cereal may not switch to Froot Loops simply because of a slight price difference. Firms, recognizing the power of differentiation, invest heavily in creating distinctive products that can command loyalty and thus protect them from competitors’ lower prices. Another great example is the smartphone market: despite Google, Samsung, and Huawei making significant advancements in camera technology, iPhone fans remain undeterred by price differentials.

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Nevo's research applies these ideas to the cereal market and can be found here. This is one of my favorite research papers, since it shows the economic complexity behind even staple foods like cereal.

The cereal market, as we recognize it today, is characterized by: (1) a high concentration of market power, with three dominant players, Kelloggs, General Mills, and Post, making most of the cereal sales; (2) high price-cost margins; (3) an astounding variety of products; and (4) intense non-price competition. But its origins were far from the colorful boxes and captivating commercials we're familiar with.

Cereals emerged from the temperance movement of the 19th century, which championed a life free from stimulants for both health and spiritual reasons. Advocates of this movement recommended abstinence, ample rest, regular exercise, and a bland vegetarian diet. From this ethos came the first cereals: hard, flavorless nuggets of ground grain which needed soaking to become softened.

 

It was in his family’s sanitarium (a health resort) in 1866 that John Kellogg introduced Cornflakes to the world. This invention laid the foundation for the cereal industry. Henry Perky unveiled Shredded Wheat in 1890, Charles Post introduced Grape Nuts in 1898 (despite it having no connection to either grapes or nuts), and soon after, Quaker launched Puffed Rice and Wheat Berries.

The real game-changer in the market dynamics was when William Kellogg acquired Cornflakes' rights in 1905. He was the first to understand and leverage product differentiation, sweetening cereals with sugar, investing heavily in advertising, and introducing the novel idea of in-box prizes. 1924 saw the creation of Wheaties, the first cereal explicitly aimed at children. Around this time, grain milling companies merged to form General Mills, a conglomerate that pioneered radio advertising, sponsored baseball teams, introduced new puffing technologies, and launched iconic brands like Cheerios and Kix.

 

Post World War II, with the widespread adoption of television and radio, cereal companies found new avenues to reach their audience. Mascots became synonymous with brands, marketing shifted its focus to children, and sugar content in cereals soared. Kellogg's, for instance, released Sugar Smacks in 1952, a cereal that was more than half sugar by weight. However, this unchecked growth and dominance led to scrutiny. By 1970, the Federal Trade Commission (FTC) filed a complaint against the big three—Kelloggs, General Mills, and Post—highlighting concerns about their market power.

 

From its humble, health-centric origins to its transformation into a marketing titan, the cereal market's journey is a testament to the power of product differentiation. Through a complex BLP structural model, Nevo sought to test this market power hypothesis. In his paper, he models the probability of a consumer's purchase decision based on product characteristics. The model takes into account both the distinctive features of various cereals and the demographic attributes of the consumer. Demographics can affect consumer preferences, and thus how different customer bases react to product characteristics. Nevo then estimates substitution patterns across products and shows that high margins in the cereal market can be attributed to successful product differentiation. Major players like General Mills, Kellogg's, and Post have mastered the art of creating a variety of products that appeal to specific audiences, thereby commanding loyalty and justifying higher prices. Specific flavors, using popular TV shows or including a PC game in the cereal box (like Chex Quest) differentiate products from store brands and from each other.

 

The strategy of differentiation isn't limited to the cereal market. Take, for instance, Popeyes. To stand out in a market dominated by giants like KFC, Popeyes positioned itself as not just a fried chicken outlet, but one offering authentic Louisiana cuisine. Their strategy extends to product quality. In the case of fried chicken fast foods, the challenge  is to ensure that the cost of providing a differentiated product imposed on franchisees doesn't outweigh the perceived value by consumers.

 

In summary, while the suspicion of cartels and collusion is natural when observing parallel pricing strategies, one must also consider market dynamics and strategies. Often, the true answers lie in a brand's ability to differentiate and position itself rather than in clandestine agreements. So, the next time you wonder about the high price tag of a particular brand, look at product differentiation and marketing strategy. The narrative might be far more complex than it appears on the surface.

Getting peopleto do what you want

Professor: Students are free to access any website they want during the exam…. But their grade will be automatically zero if they do.”

There are many books promising to teach the art of influencing others. Economics cannot teach you how to be charismatic, but it can certainly teach you how to provide the right incentives. This is the heart of contract theory, one of the most interesting fields of economics and and intricate extension of game theory.

An interesting example of contract theory was popularized by David Friedman. It's the tale of two merchants racing their camels across the desert. While crossing the desert, they complain to each other about their camels' speed and challenge each other: who owns the slowest camel? They design a race where the last to reach the town wins gold. But this setup only makes them decelerate, leaving them willingly stranded in the desert. A passing wise man sees the bizarre situation. After talking to the merchants, he understands their goal and whispers something that prompts them to race as fast as they can to the next town. What did he say? He offered a simple solution: switch camels. By changing the rules of the game, he ensured no one had a reason to hide the camel's true capabilities. Winning the race with the competitor’s camel would prove that his camel was the fastest. This story captures contract theory's concept of truth-telling mechanisms. Such mechanisms are rules that incentivize individuals to be honest, by making the honest action the profit-maximizing one.

Sun Tzu's "Art of War" presents another example. He advises generals to burn their boats and bridges upon reaching a battlefield. Why? Because it erases any temptation to retreat. If fleeing ensures death, the soldiers' only rational choice is to fight and win, aligning their objectives with the general's.

Economists constantly seek mechanisms that align seemingly opposing incentives. For instance, Van Essen and Wooders' recent research (link) discusses a unique auction structure for partnership dissolution. The core idea? Think cake-cutting. Let’s say you need to divide a cake between two children. Let one child cut the cake, and the other choose their piece. The first will cut evenly, fearing the second might select the larger piece if the pieces are different. Likewise, in partnerships, it is possible to assign one partner the responsibility of valuation and the other partner the choice of buying the remaining stake or selling their own.

Contract theory also pervades other domains like airline pricing, sales commissions, and nuclear policies.

01

Airlines face a dichotomy when contemplating ticket price hikes. High prices mean increased profits per sale but might deter potential customers. Their best option would be to increase prices just for those that would still buy. To do this, airlines employ what we call price discrimination. They can, for example, deduce a customer's price sensitivity from their booking time. Last-minute bookers, typically on business, have less flexibility and are less sensitive to price fluctuations. Conversely, those booking months in advance, will likely travel on vacation, and might adjust travel plans if fares are too high.

02

Sales commissions Companies generally want salespeople to employ the most effort on each sale. However, it is hard to know whether this is truly happening. A sale might not have happened because of a salesperson's lack of effort or because the customer didn’t like the product. Therefore, to incentivize maximal effort, commissions could be used. A fixed salary doesn't ensure maximum effort, since then salespeople will be paid, whether they try to sell or not. With commissions, their best chance of maximizing their pay is by effort, which is also the goal of the company. However, for some situations salespeople’s effort is not relevant. For example, for high-ticket items, customers might know what they want and go for the item regardless of what the sales team does. Thus, a commission cap can redirect salespeople's efforts to medium-ticket items, which genuinely require sales effort.

03

In nuclear deterrence, aligning incentives means both nations have equal stakes in not initiating nuclear wars. The concept of mutually assured destruction ensures both parties face dire consequences if they initiate a nuclear strike. Stanley Kubrick's film "Dr. Strangelove" cleverly portrays this (spoiler alert!). The film showcases a 'doomsday machine', designed by Soviets to obliterate the world if a nuclear war ensues. This automated destruction ensures the threat's credibility, since human operators might be reluctant to destroy the world. The twist? Due to bureaucratic oversights, the Soviets forget to publicize the machine's existence, and a rogue American general inadvertently starts a nuclear war (and the worlds’ destruction), underscoring the criticality of information in contract theory.

If your goal is to genuinely influence people, mathematical models and contract theory might offer better insights than self-help books.

Hospital’s billing department: Ok, let’s see here. I saw that you waved 'hello' to the doctor across the street. That'll be $2,000 for your insurance company and a $500 copay for you."

Why is affordablehealthcare sohard to get?

All of us want affordable healthcare. We all dream of a world where one isn't faced with the choice between their life and the financial ruin of their family. While it's easy to blame healthcare solely on insurance companies or on corporate greed, the reality is more complicated. Let us discuss some of these reasons:

01

The Role of Technology in Healthcare: Quick research and technological advancements, as showcased during the COVID-19 pandemic, are crucial for healthcare. But behind every breakthrough lies immense R&D costs. Herein lies the dilemma: we grant companies exclusive rights to their discoveries for a set duration through patents, ensuring they recoup costs and profit. But these patents lead to monopolies and result in high prices. On the other hand, while weaker patents might reduce costs now, would they hinder medical advancements in the long run? By investing more in certain treatments today, we might be ensuring their very existence. Additionally, paying a premium now can be viewed as paving the way for more affordable care in the future. Striking the right balance among these factors is challenging, and there's no one-size-fits-all solution.

02

Regulation in Health Professions: Healthcare professions require rigorous training and adherence to high standards. Obtaining degrees in fields like medicine, nursing, and physical therapy is both costly and stringently regulated by their respective professional associations. These measures, while ensuring the quality of care, limit the number of professionals entering the field. A reduced number of professionals against a backdrop of increasing demand pushes costs up. Expanding the number of institutions that offer these degrees and boosting graduate numbers presents significant challenges. Would loosening regulations, potentially compromising care quality, be the answer to reduced costs?

03

Navigating Insurance Market Dynamics: At its core, insurance is about risk pooling. Not every insured individual will fall sick simultaneously. Consider, for example, an insurance company with 10 beneficiaries, 9 healthy and one sick. Payments from healthy beneficiaries can cover the treatment of the sick beneficiary. However, if only those anticipating significant health issues opt for insurance, the system becomes untenable. In this scenario, rather than a mix of 9 healthy individuals and 1 sick person, our illustrative insurance company would be faced with 10 insured elderly individuals, of whom 9 require care. This would be unsustainable and could lead to system failure. Linking insurance to employers might ensure a diverse group of policyholders, but it excludes those that are self-employed, for example. Moreover, it incentivizes firms to hire individuals with no health conditions. Mandating insurance might diminish the incentive for insurance companies to optimize efficiency, considering they'd have a guaranteed client base. Again, there's no one-size-fits-all solution.

04

Interplay Between Providers and Insurers: The dynamics between healthcare providers and insurance companies can't be overlooked. Hospitals and clinics are costly to establish and operate. Moreover, it takes time and resources to hire the best teams and to build their reputation. Hence, existing providers can wield significant bargaining power over insurance companies, often charging them substantially more than what they do from uninsured patients. While insurers attempt to counterbalance this with auditing and negotiations, the process adds another layer of administrative costs which, along with providers’ market power, increases the costs of insurance for all. Rising insurance costs might result in more healthy individuals going uninsured, threatening the equilibrium of the system. To counteract this, insurance companies implement co-payment policies, which also raise costs for the end users.

05

Public Healthcare Systems: Could government-managed healthcare be the solution? When governments act as universal insurers, that is, paying private providers for care, there are concerns about efficiency and transparency. Governments often lag in efficiency when it comes to bargaining, given their access to taxpayer funds. Their reaction to deficits is generally slower than a firm's response to profit and loss fluctuations. Thus, governments may end up paying even more for providers. Alternatively, governments might opt to directly oversee their own hospitals, employing doctors and providing equipment. Yet, the persistent challenge remains: ensuring that the government can do that efficiently, as well as rapidly and effectively meeting society’s changing healthcare needs.

In our quest for the ideal healthcare model, it's important to dive into these complexities. Policies often give rise to unintended outcomes. Consider a scenario where the number of healthcare providers is static or evolves slowly. In such a case, subsidizing care could primarily inflate prices without significantly expanding access to care for more individuals. Similarly, regulating insurance companies may just lead to a more concentrated insurance market. Simplistic narratives of 'good vs. evil' won't suffice and may prevent us from reaching a healthcare system that works for all.

Why do economistscare about fertility?

       Grandson: I'm so broke with inflation and these high rents, I don't think I can afford to have kids

Grandmother: Back in my day, we were so poor and rent was so expensive, we couldn't stop having children.

Fertility might not be the first topic that comes to mind when thinking about economic issues. However, its implications for the economy are profound. Let’s discuss some of them. Consider scenarios where unforeseen events like wars or pandemics drastically reduce fertility rates. Such reductions can have long-lasting impacts on the size of the labor force. While firms can adjust the production of goods fairly quickly to changes in demand, adjusting the supply of workers isn't as straightforward. Fewer people not only affect production capacity but also marriage opportunities, the efficiency of public services, and the stability of social security systems. An aging population poses significant challenges. With more retirees and fewer working-age individuals, there's the potential for a heavier reliance on a smaller youth demographic. If the social security system fails, the elderly might find themselves depending more on their children, in addition to state and private pensions. This could create a cascading effect: young generations, under mounting financial stress, may opt to have fewer children, further exacerbating the population age imbalance. An aging population may disrupt other industries. Health insurance companies, for example, may see an increase in the rate of health insurance beneficiaries requiring care. Again, insurance companies will rely on a small number of young beneficiaries. Moreover, fewer births mean fewer students as time passes. Over time, universities and schools might find it challenging to sustain their infrastructures, with diminishing enrollments making it hard to cover fixed operational costs. As populations age, resource allocation and consumer spending patterns could shift. Industries that cater to the needs of the elderly are likely to gain prominence. Additionally, the political landscape may evolve to prioritize the interests of older demographics, as they move towards being the majority of the voting population. Economists have been warning potential economic challenges of aging populations for years now. For example, David Bloom, David Canning, and Gunther Fink suggested that reduced labor force participation and declining savings rates could slow economic growth. Research by Nicole Maestas, Kathleen Mullen, and David Powell suggests that older and younger workers often complement each other in workplaces. A decline in either demographic can significantly disrupt productivity levels. The effects of reduced fertility might be mitigated if workers retire later in life or if migration intensifies. Moreover, automation might address demographic shifts, filling gaps created by population aging. A reduced number of young workers make up for the increased number of retirees if their productivity rises as well. There are other aspects of fertility studied by economists, such as the repercussions of unplanned pregnancies, the rise in single-parent households, and the concerns around teenage pregnancies. For example, teenage childbearing was shown by the literature to be correlated with lower education levels, reduced labor force involvement, and diminished incomes. Further compounding this issue is that children born to teenage mothers often face more challenging life prospects and are more likely to be teenage parents themselves, perpetuating a cycle. Since teenage fertility significantly impacts Hispanic and Black communities more, it can also be a mechanism that perpetuates racial disparities. Present economic conditions, be it inflation, recessions, or trends in real estate prices, can influence and shape fertility choices. These decisions, in turn, drive our economic trajectories for years to come. That’s why fertility deserves its spot in economic discussions. Ensuring population stability, sustaining social security, preventing unplanned pregnancies, among others are key policy areas that economists are closely examining.

The Logic ofSecuritiesRegulation

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Securities markets serve as a bridge, directing capital from savers to entrepreneurs. They offer an alternative to traditional banking systems where investors need first to deposit funds and then banks, based on their risk assessments, channel these funds into loans.


Securities facilitate direct capital allocation without the need for intermediaries. Debt securities like bonds are analogous to loans, or fractions of loans, having specified maturity dates (the due date for final payments), coupon rates (interest rate paid to bondholders), and face values (amount due to the holder when the bond matures). In contrast, equity securities denote ownership stakes in a company, entitling holders to dividends from profits as well as to vote on company issues. Unlike debt, equity doesn't mandate repayments, but it does mean yielding some business control and a right to dividends.


The lack of intermediaries in securities markets may seem advantageous—entrepreneurs might secure more affordable loans, and savers could enjoy higher returns. However, despite the apparent lack of intermediation, there are more costs associated with them. The SEC (Securities and Exchange Commission) stipulates requirements for issuing securities, with procedures sometimes spanning up to a year. These often require due diligence exercises and the involvement of an underwriter (an investment bank) to assist in the distribution of securities. Usually underwriters guarantee a minimum price for securities, committing to purchase them at the initial offering price. These associated costs mean primarily large firms can afford to navigate this, which weakens the securities market as a cheaper way to seek investments.


Why the stringent rules? The primary goal is investor protection. In the wake of the 1929 Wall Street Crash, the SEC was instituted. Companies wishing to go public need to file a registration statement with the SEC, ensuring transparency and accuracy of the disclosed information. The idea is to prevent false information, fraudulent businesses, information asymmetry and insider trading, i.e. misuse of undisclosed information.


The advantages of these regulations are reiterated whenever cases like Enron and Lehman Brothers are revealed. But does society truly gain from these rules? Is the market more efficient with elevated risk levels? Do minimum risk standards attract more investments for all players? Although regulations aim for transparency, even with insider trading regulations, stock prices often start reacting to important events even before they are officially disclosed. Securities may also take the shape of cryptocurrencies or intricate purchase-lease agreements, which raises discussions of whether the SEC regulation applies (check out this case for example SEC Press Release 2023-59).

Balancing access to funds with investor protection requires a nuanced approach, and there doesn't seem to be a universally perfect solution.

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