2017 / Volume 1 / Issue 2 Cowles Q uarterly N ew sl e t t e r
COWLES 2017 CONFERENCE SEASON
Features COSTAS ARKOLAKIS Faculty Profile MITSURU IGAMI Q & A Cow les Quarterly Volume 1, Number 2 CONTENTS A NOTE FROM THE EDITOR ...... 3
FA CULTY FOCUS COSTAS ARKOLAKIS ...... 4 FROM THE A RCHIVES COWLES 50th ANNIVERSARY ...... 5
FEA TURE GEANAKOPOLOS REVELS IN GROWING POPULARITY OF GENERAL EQUILIBRIUM CONFERENCE...... 6
COWLES 2017 SUMMER CONFERENCE SERIES RECAP...... 7
Q&A MITSURU IGAMI ESTIMATING THE INNOVATOR'S DILEMMA ...... 8
COWLES FOUNDA TION DISCUSSION PA PERS 2017 FIRST QUARTER ...... 10
On the cover: Economic Theory Conference session, Evans Hall Table of contents: Evans Hall, Yale School of Management
2 Cowles Quarterly A NOTE FROM THE EDITOR
Cowles' fifth season
We dedicate this issue to the time of the year that falls between spring and summer; the frenzied fifth season, or what Cowles staff members endearingly call "conference season." With all hands on deck, the foundation held the 13th Annual Conference on General Equilibrium and its Applications in April, and the Cowles Summer Conferences in early June. Both were very successful as was evident by the record number of participants and their feedback. What's more, a new venue at Evans Hall, Yale School of Management, proved to be a welcome change.
Please take a moment to read about the conferences, as well as two articles on Cowles research staff members, Professors Costas Arkolakis and Mitsuru Igami, who are doing exciting research in their respective fields. In fact, both faculty members were recently featured in the Yale News with articles written by Mike Cummings. Mike's article on Mitsuru Igami is featured in this issue, and you can find Mike's piece on Costas Arkolakis by following the link at the end of Costas' feature article in this issue.
Enjoy the next few pages of summer reading and stay tuned for future issues. If you have any comments, corrections, or story ideas, please feel free to contact me directly at [email protected]. Remember to visit the Cowles website regularly for updates and new discussion paper postings, follow us on Twitter, and like us on Facebook.
Matthew Regan Communications Manager, Cowles Foundation
Website: http://cowles.yale.edu Editing/Writing: Matthew Regan and Michael Cummings Online newsletter: http://cowles.yale.edu/newsletter Design: Matthew Regan Email: [email protected]
3 Cowles Quarterly COSTAS ARKOLAKIS Faculty Focus
By Matthew Regan
I n this issue we congratulate Costas Arkolakis, Henry Kohn Associate Professor of Economics, who received the 2017 Bodossaki Foundation Distinguished Young Scientists Award for social-economic sciences. A member of the department since 2007, Arkolakis? research and teaching specializes in general equilibrium trade theory, spatial economics, and macroeconomics.
The Distinguished Young Scientists Award is give out by the Bodossaki Foundation to distinguished scholars of Greek nationality or decent, and who are under the age of 45. According to the organization, ?these prizes aim to support the creative work of young Greek scientists and to reward their commitment and effort to the advancement of science as well as to contribute to the promotion of exemplar role models for the society.? This is the first year the prize has been awarded since 2008 due to the economic crisis in Greece. When the Bodossaki Foundation resumed the prize last fall, there appeared to be a renewed interest which was evident in the uptick in submissions. ?This programme attracted a large number of brilliant candidates making the selection of the prizewinner a particularly difficult task for the Screening Committees,? said Bodossaki Foundation President, Dimitris Vlastos. ?Given the strong competition between scientists of the highest level in this field, we believe that Dr. Arkolakis? distinction is particularly honouring.? The selection of the prize winners are based on their exceptional achievements in the respective field by a nine-member selection committee of specialists. The committee then makes recommendations to the Board of Trustees who ultimately select the prizewinners. This year?s winners receive a 10,000 EUR prize, and are invited to attend a ceremony in Athens at the beginning of June, where the prizes will be delivered by the President of Greece, Prokopis Pavlopoulos. Arkolakis continues the tradition by joining three past Yale economics faculty award winners: John Geanakoplos (1993), Costas J. Meghir (1996), and Pinelopi D. Koujianou-Goldberg (2003). A member of the department since 2007, Arkolakis? research and teaching specializes in general equilibrium trade theory, spatial economics, and macroeconomics. For an in-depth interview with Costas, see the Yale News article profiling Costas and his research: Economist Costas Arkolakis Prizes Cross-disciplinary Approach
4 COWLES QUARTERLY FROM THE ARCHIVES Cowles 50th Anniversary Celebration June 3-4, 1983
For this issue, we dig back in our archives to showcase the Cowles 50th Anniversary Celebration held on Friday and Saturday, June 3-4, 1983. The gathering featured five of the six Nobel Prize winners associated with the Cowles Foundation: Kenneth Arrow, Tjalling Koopmans, James Tobin, Paul Samuelson, and Lawrence Klein. Below is an article from the New Haven Register.
New Haven Register, June 4, 1983
5 COWLES QUARTERLY 13TH ANNUAL CONFERENCE ON GENERAL EQUILIBRIUM
GEANAKOPLOS REVELS IN GROWING POPULARITY
By Matthew Regan
The 13th annual Conference on General Equilibrium and its Applications sponsored by the Cowles Foundation, was held on April 28-29, 2017. The two-day event hosted upward of 70 speakers and participants from the U.S. and abroad specializing in the study of general equilibrium (GE) economics.
T he GE conference was founded in 2005 by John to the interest the conference has Geanakoplos, James Tobin Professor of Economics, along gained over the years, something with UPenn Professor, and former Yale Assistant Geanakoplos is quite proud of. ?It Professor, David Cass. ?We thought general equilibrium is becoming quite a big deal,? he was a unifying theme for many different fields of said. economics. We thought the most exciting work in The study of general equilibrium is economics was being done in macro and finance, but we not new to Yale, with the Cowles wanted to take a more theoretical approach to these Foundation, as it is steeped in subjects,? said Geanakoplos when asked why the tradition with many former conference was started. members focusing their research in In its simplest definition, ?general equilibrium means the area. Two of the greatest GE theorists were Kenneth supply and demand among many different markets at the Arrow and Gérard Debreu, both of whom were Cowles same time and how they interact with each other,? said research staff members and Nobel laureates. The two Geanakoplos who also serves as the conference lead economists also ran a conference dedicated to GE in the organizer. 1960s and 70s. Having humble beginnings with 40-50 paper submissions Although the number of Yale faculty focusing on GE has its inaugural year, the conference has become a prestigious decreased over the years with the recent retirement of Don event in the area of GE. The number of submissions grew Brown and the death of Hebert Scarf, classes on the to nearly 130 papers this year, with only 13 papers selected subject are still taught by Geanakoplos and Truman to present. While competition is quite stiff, it is a testament Bewley, Alfred C. Cowles Professor of Economics. It is, however, the hope of Geanakoplos to rejuvenate faculty interest in GE, and the annual conference is one way to do so. ?General equilibrium theory has become one of the standard methodologies in macro economics and finance and international trade. It used to be regarded as the most theoretical of the economics fields,? said Geanakoplos. ?Now it?s become so successful that it?s permeated many applied fields.? This year?s complete schedule listing of times, talks, and presenters can be found on the 13th Annual GE conference page: http://cowles.yale.edu/conferences/ge13
6 Cowles Quarterly Cowles 2017 Summer Conference Series Recap
By Matthew Regan
The Cowles Foundation wrapped up its 2017 summer conference series which featured five areas of economic research. A record number of participants partook in the five-day event coming from as far away as Asia, Europe, and South America.
T he annual conference is typically held the second week For the past nine years, the conferences were held at the of June and highlights the economic programs associated old School of Management?s Watson Center. Feedback with the Cowles Foundation which include Economic from participants has been positive according to Theory, Econometrics, International Trade, conference coordinator, Darlene Smith. ?The modern Macroeconomics, and Structural Microeconomics. building with its open space made it more conducive for participants to have intimate conversations between Each program conference spanned two days except for sessions,? said Smith. ?The building staff were also easy to International Trade which held its inaugural conference, work with and provided great service.? and lasted one day. With an average of six sessions per day, each conference drew 50-80 participants totaling more Samuelson agreed saying, ?The new SOM building proved than 275 attendees over the week. to be an ideal venue for the conference. The combination of state-of-the-art rooms for the talks with ample open ?Each of the conferences has the feeling of a two-day space for discussion among the leading economists in the area. It?s people to an intense but immensely rewarding experience,? said congregate and Cowles Foundation Director, Larry Samuelson. talk proved to Seen as one of the foremost conferences in the field of be quite economics, the event is by invitation only. Samuelson effective. The noted that it is a fine line striking a balance between formal talks at including as many people as possible, with the need to a conference keep the setting relatively intimate. set the stage, ?The participants routinely indicate that the Cowles with much of conferences are among the best and most productive the work being conferences they have attended,? said Samuelson. ?That done in the said, we are constantly looking for ways to improve the informal discussions that surround these talks.? experience. Each year the Cowles staff becomes more Tentative dates for next year?s summer conferences are effective in staging the conferences and ensuring that the scheduled for June 4-8, 2018. conferences run sufficiently smoothly that participants can For a complete schedule listing of times, talks, and focus on the research.? presenters from this year?s conferences, visit the Cowles New to the conference series this year was its venue which Conference and Workshop page. was held at the Yale School of Management?s Evans Hall.
7 COWLES QUARTERLY MITSURU IGAMI
Estimating the Innovator's Dilemma: Q&A
By Mike Cummings
K odak, once a giant of global and condensed version of the serious empirical evidence. industry, is a shell of its former self conversation follows. ? largely undone by the rise of HOW DOES YOUR APPROACH digital photography. Borders, which WHAT DREW YOU TO STUDY DIFFER FROM CHRISTENSEN?S operated hundreds of bookstores at its BOTH THE CONCEPT OF THE APPROACH? height, liquidated in 2011 ? a INNOVATOR?S DILEMMA AND There are three key differences. The casualty of Amazon?s dominance in CHRISTENSEN?S APPROACH TO first concerns method. He took more online retail. Nokia, an early leader in IT? of an anthropological approach in the smartphone market, proved Trying to understand why incumbent conducting what is essentially a unable to compete with Apple?s firms lag behind new entrants when business history. He interviewed iPhone and Samsung?s Galaxy drastic innovations are happening is former executives at failed firms and products. an old topic for economists. Karl identified factors and decisions that Marx and Joseph Schumpeter in the appeared to explain why those firms Economists and businesses have long late 19th and early 20th centuries, failed to grasp new generations of sought to understand why established respectively, considered the turnover technologies. Christensen was sitting companies lag behind younger of technologies. Schumpeter coined on this pile of quantitative data about companies in introducing new the term ?creative destruction? to the hard drive industry without really technologies and innovative products. describe the simultaneous turnovers using it. I performed an analysis of In a 1997 bestseller, ?The Innovator?s of technologies and firms. New the same data, which covered the hard Dilemma,? Harvard Business School technologies come; old technologies drive industry 1976 through 1998, Professor Clayton Christensen pinned go. New firms come; old firms go. using mathematical models. the phenomenon on irrational decision making by the ?old The term ?innovator?s dilemma? Secondly, Christensen mainly focuses champion? firms. He based his focuses on the decision making of on intra-firm politics, which is what conclusion, in part, on a case study of established firms. If they are too slow he learned from interviewing people. the hard disk drive industry. to innovate, they will disappear. Why As an economist, I was more do they resist innovation? interested in inter-firm competition. Yale economist Mitsuru Igami, How many firms are competing? Christensen resorted to some notion analyzing the same data on the hard How many are established firms of stupidity or irrationality in trying drive industry, has arrived at a versus startups? different conclusion: Established to explain why these firms failed. As firms can fail to innovate even when a trained economist, I wanted to The third difference is the nature of their managers behave perfectly answer with simpler logic. Could our explanations. He resorted to rationally. He described his findings there be a reason, even if firms explanations involving irrationality, in an article published recently in the behave rationally, that they would be including problems that arose from Journal of Political Economy. reluctant to introduce new internal resource struggles, bounded technology? There has been rationality, and myopic managerial Igami, an assistant professor of theoretical work on this question, decision-making. Trained economists economics, spoke with such as late Kenneth Arrow?s paper in are skeptical of ?irrationality? as a YaleNews about his work. An edited 1962, but my study provides the first serious answer.
8 Cowles Quarterly Continued from page 8
If you say a company failed because free parameter in my model. reality. That sounds like bad news, its executives were stupid, it is almost but the flipside of the finding is that Incumbents, on average, seemed like saying they must have been the actual historical trajectory of the more able to innovate than new firms. stupid because they failed. There is hard drive industry is very hard to This makes sense because, while my some sense of tautology there. I beat with clever schemes. That?s kind data crosses generation, it essentially analyzed data to find whether there of encouraging. involves the same hard drive are fundamental reasons why old engineering technology, which should firms can behave rationally and still give incumbents an advantage. But lag behind new firms in innovation. even with this advantage, WHAT DID YOU FIND? cannibalization turned out to be a more powerful factor that pulls It?s very simple: Incumbent firms ? established firms behind. the old champions ? are by definition very good at operating with the existing technology and churning YOU ALSO EXAMINED THE out old products. To the extent that EFFECTS OF PUBLIC POLICIES the new products and old products MEANT TO STIMULATE compete with each other, or substitute INNOVATION. WHAT DID YOU for each other ? a phenomenon FIND? called cannibalization ? it makes There are many different ways people incumbent firms less inclined to consider designing public policies to GIVEN YOUR RESEARCH, WHAT embrace innovation. If you are an old foster innovation and/or competition. IS YOUR BEST ADVICE TO CEOS champion firm introducing new I tried simulation experiments to find OF ESTABLISHED TECHNOLOGY products, to some extent you are just a combination of policies that would FIRMS? replacing your old source of profit be most effective, because I cannot with a new one. You might earn 5% My advice to managers who want to actually go back 40 years and tweak or 10% more profits, but that?s it. By prolong the life of their firms is: government policy on Silicon Valley. contrast, if you are a startup, you are Destroy yourself. In other words, you All you can do is build a theoretical starting from zero profits. By can survive the process of creative model, flesh it out with data analysis, definition, incumbent firms have less destruction only through and conduct these simulation incentive to introduce new products. self-destruction. Don?t be afraid of experiments. cannibalizing old products. Let them DO THE ?OLD CHAMPION? One of my experiments concerns the go and invest in new products. FIRMS POSSESS ADVANTAGES patent system, such as making patents Of course, from a shareholder?s OVER STARTUPS? HOW DO stronger or broader. The other perspective, this idea of rational THOSE ADVANTAGES FACTOR explores whether there might be a suicide involves letting go of profits INTO THE QUESTION? structure of patents and licensing fees that could be earned through old tech. It?s a good point. My model allows ? fees charged by patent holders for For them, it might make sense for the for potential differences in efficiency use of their idea ? that would foster firm to continue making money with and capability. I?m letting data speak innovation and competition the old products. I would expect some in terms of whether, on average, old simultaneously. What constitutes the tension and struggle between the firms or new firms are better at optimal fee structure is an open interests of shareholders and innovating. There are competing question, so I tried many different fee managers, but long-term success theories. When Schumpeter was structures. Nothing really depends on developing new and young in the 1920s and 1930s, he convincingly outperformed the actual innovative products, which requires argued that younger entrepreneurial history of the hard drive industry. killing off the old ones. firms should be leading innovation. An ideal patent system might do a He changed his mind as he grew older To live, you have to die. Sounds like good job of fostering innovation. In Zen, but that?s my research and life. and moved from Austria to Harvard, reality, the patent system is messy. and began arguing that established Nobody knows who owns what Editor's note: This article was firms might have accumulated patent on what piece of technology. It originally posted in the June 5, 2017 knowledge and other advantages. The is hard to envision a better edition of the Yale News. only reasonable course for an functioning system that could exist in empiricist like me is to let this be a
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