Advancing Economics

THE BECKER FRIEDMAN INSTITUTE FOR RESEARCH IN ECONOMICS

2014–15 Annual Report 2 HIGHLIGHTS

4 CONFERENCES

6 RESEARCH INITIATIVES

8 VISITING SCHOLARS

12 SAIEH HALL

14 STUDENT EVENTS

16 OUTREACH

21 FINANCIALS

22 HONOR ROLL

24 LEADERSHIP From the Leadership

The Becker Friedman Institute began 2014–15 in new facilities and has enjoyed and prospered in our home in Saieh Hall. Before, given limited space, there was a virtual aspect to our institute; now with dedicated offices for visiting scholars and room to host workshops, lectures, and academic conferences, we have changed in truly important ways.

This past year we had 47 visitors to the Institute, hosted 12 academic conferences, and sponsored 26 events for student and public outreach. We welcomed scholars from all over the world, achieving our ambition to be a true intellectual destination for new research advances.

Motivating these activities and our research initiatives is the belief that informed discussions of prudent public policy are uplifted by formal eco- nomic analysis and empirical evidence. As made clear, the conclusions of economics “are immediately relevant to important . . . questions of what ought to be done and how any given goal can be attained.”

While we miss the inspiring intellectual leadership of , we continue to explore his vast scholarly interests while pursuing a growing range of interconnected research initiatives.

We now have the opportunity to bring in elite scholars for longer term visits to the institute to complement strengths on campus and explore exciting new endeavors. We continue to welcome returning distinguished institute scholars and our new young scholars, including Mohammad Akbarpour and Manasi Deshpande. Our ambition is to host four to six postdoctoral research fellows in residence to add energy and ambition to our institute activities and the broader economics community.

Finally, we are pleased to announce our Chicago economics history project, which will showcase the intellectual contributions associated with the University in ways that go beyond the simplistic characterizations often projected in public forums. An exhibit, oral histories of Chicago , and other features will offer a rich exploration of our past.

We are excited by our opportunities in the upcoming year. We are supported by a team of dedicated staff and guided by an Institute Research Council of distinguished scholars as well as an advisory council that works to strengthen the institute. We are grateful for the generosity of those who have made our work possible, and we look forward to continuing support.

Lars Peter Hansen Kevin M. Murphy Director and Cochair Cochair 2014–15 Highlights 47 236 18 38 Visiting Presenters Student Total scholars events events

In 2014–15, the Becker Friedman Institute capitalized on beautiful and spacious new quarters in Saieh Hall for Economics to be come a true intellectual destination for economic inquiry.

Our flourishing visitors program hosted a record policymakers spent time at the institute as visiting 47 economists and other scholars who shared their scholars. work in seminars, talks, and informal discussions. Notably, this year we increased our direct support Twelve research conferences, eighteen events for for research, providing funding to thirteen students, and eight public talks on topical issues faculty members through the Rosenfield Program conveyed economic insights and analysis to widen- in Economics, Public Policy and Law; to our ing network of researchers, students, policymakers, postdoctoral research fellows; and to twenty-seven alumni, and the public. graduate students through our Macro Financial We’re especially proud that many of these events Modeling Initiative funded by the Alfred P. Sloan involved and engaged policymakers, generating Foundation. valuable exchanges about how research, evidence, Read on for more details of our active and and new models can inform public policy. Several productive year.

2 | The 3,450 Total audience

Stanford’s Susan Athey at a student- Research Scholar organized panel on big data Benjamin Brooks

The Bank of England’s Charles Evans, president of the Federal Reserve Bank of Chicago, Andrew Haldane with former Bank of England governor Sir Becker Mervyn Friedman King Institute | 3 RESEARCH CONFERENCES Becker Memorial Highlights Year of Diverse Conferences

As Gary S. Becker once said, “economics is judged ultimately by how well it helps us understand the world, and how well we can improve it.” By that standard, his long career was a brilliant success, as his incisive economic analysis illuminated a wide swath of life: education, discrimination, marriage and family life, crime, addiction, and more.

The institute celebrated Summing up Becker’s influence, panel modera- the scope and influence tor said that he and Pierre-André of Becker’s work at a Chiappori once analyzed the impact of leading conference in his memory economists by totaling how many times their work October 30–31, 2014. was cited as a motivation for other papers. Becker Leading scholars and clearly led the pack, with more than three times longtime colleagues the number of papers of any other —and gathered to present work in the areas aligned these influential papers appeared in each of six with or inspired by his research. decades, Levitt said.

Panels of fellow faculty members explored two Other campus colleagues and some from across key areas of inquiry that Becker pioneered: human the country and abroad presented recent research capital theory and its role in development and in the fields that Becker pioneered. They included: growth, and the economics of crime and the law. • Richard Blundell of University College London, A pioneer of human capital theory, Becker was on inequality, insurance, and family labor supply interested in the power of education to influence • Pierre-André Chiappori of almost everything. In that vein, fellow Nobel laureate on human capital, matching, and labor supply Robert E. Lucas Jr. and Harvard economists Claudia • Scott Kominers of the Harvard Society of Fellows Goldin and Edward Glaeser shared evidence on on strategy-proofness, investment efficiency, and the link between education and lower fertility rates, marginal returns higher female participation in the economy, and • Edward Lazear of , applying improved political governance. Becker’s work on human capital and fertility to analyze the demographics of entrepreneurship In the second panel, William Landes of the • Assar Lindbeck of Stockholm University, on UChicago Law School discussed how Becker’s norms, incentives, and information in income work, rooted in the assumption that offenders are insurance responsive to costs, benefits, and sanctions, gave • Kevin Murphy, presenting work coauthored rise to a very large empirical literature on the eco- with Becker on the economics of persuasion in nomics of crime. Professor of Economics Casey advertising Mulligan discussed how Becker’s work extended the notion of imperfect competition to politics, James J. Heckman spoke on the market and non- while Sam Peltzman of Chicago Booth highlighted market benefits of human capital, and later con- Becker’s lesser-known role as a major figure in the cluded the conference with a keynote address on economic analysis of regulation. the impact of Becker’s research.

4 | The University of Chicago Academic Conferences 2014–15 Midway Market Design Conference

The Society for Economic Measurement

Creditors and Corporate Governance

Interactions: Bringing Together Econometrics and Applied Richard Blundell, Microeconomics Guity Nashat Becker University College London Normative Ethics and Welfare Economics

A Celebration of the Life and Work of Gary S. Becker

Science of Philanthropy

Macro Financial Modeling and Macroeconomic Fragility (New York)

Flows of Goods and Technologies in the Global Economy

Exploring the Price of Policy Uncertainty (Washington DC)

Conference on the Handbook of Macroeconomics, Volume 2

Federal Agency Decision Making Under Deep Uncertainty

Always empirical, Heckman considered a number Heckman explained that when Becker began his of different ways to quantify Becker’s impact. One work, the general view of was that things like family measure was his awards—the Nobel Prize, the life and individual choices about labor supply National Medal of Science, and the Presidential were not for economic study. But Becker and Medal of Freedom among them. Another was the the Chicago School changed all of that. “What is opinions of his teachers; in 2001 Milton Friedman notable about Gary Becker is that as he evolved said “Gary Becker was the most influential social in his thinking, he took the field of economics with scientist of the past half century,” Heckman noted. him—and later, many other social sciences too,” Heckman said.

Becker Friedman Institute | 5 RESEARCH INITIATIVES Initiatives Deepen Economic Inquiry

Economic research can provide evidence to shape effective policy, and that motivates much of the work the institute supports. This year, however, we also invested in research that looks at how policy and economic models should account for what we don’t know.

With funding from the MacArthur Foundation, the and legislators should make regulatory choices institute launched the Price of Policy Uncertainty when required cost-benefit analysis is ambiguous. Initiative, which pursues key questions about accu- In May, initiative co-investigator rate measurement and economic impact of such gave two talks on the consequences of uncertainty uncertainty. It explores how individuals’ doubts and in Washington and later gave one in Paris. The responses to unknowns can be factored into mod- institute also provided direct research support to els, forecasts, and policies themselves. co-investigator Steven J. Davis and colleagues, In 2015, this initiative organized two conferences. who are refining an index that measures policy “Exploring the Price of Policy Uncertainty,” held uncertainty. To share this emerging research with April 7–8, 2015 in collaboration with the Urban wider audiences, the institute launched a video Institute, was the first institute event that engaged series with two releases exploring the key research the Washington, DC policy community and schol- questions pursued by active group of UChicago ars in that area. On May 8–9, colleagues at the scholars. University of Chicago Law School and Harris School Other active research initiatives explore issues of Public Policy collaborated to present “Federal or areas of economics with activities summarized Agency Decision Making Under Deep Uncertainty.” at right. This conference examined how agencies, courts,

Price Theory initiative director Steven Levitt

6 | The University of Chicago The Andrew and Betsy Rosenfield Brent Neiman, Felix Tintelnot, and Among its many notable activities, Program in Economics, Public Alessandra Voena in the Department HCEO presented its second Summer Policy, and Law of Economics and Eric Budish, School on Socioeconomic Inequality Within this program, several initiatives Loukas Karabarbounis, and Neale June 30–July 4 at the University of maintained an active roster of pro- Mahoney at Chicago Booth. Chicago Center in Beijing. Other grams and learning opportunities. conferences explored identity and Economics of the Family sponsored inequality, social mobility, the effects the “Asian Family in Transition” con- Chicago Experiments continued of socioeconomic status on identity ference March 26–27, 2015 in Hong to run numerous economic field and personality, school choice, and Kong. Researchers presented work experiments in settings ranging from family economics. the Parent Academy in the United exploring the economic conse- Kingdom to residential energy use quences of changing household and Industrial Organization in California and Vermont. The initia- family formation and labor patterns. This emerging initiative hosted visit- tive’s Science of Philanthropy con- The initiative also continued the ing scholars Isabelle Perrigne and ference, held November 7–8, 2014, weekly Family Economics Workshop, Quang Vuong of New York University, brought together researchers and to review new work in the field. Glen Weyl of Microsoft Research, and nonprofit leaders to share insights Frank Wolak of Stanford University. about individuals’ giving behavior. Fiscal Studies The initiative also made preparations With support from Donald R. Macroeconomic Financial to host its first Summer Institute Wilson Jr., AB’88, and Edward R. Modeling and Systemic Risk on Field Experiments for young Allen III, PhD’92, this initiative pre- The MFM Working Group continued researchers interested in the field in sented a public talk, “The Role and its efforts to develop and evaluate mid-July 2015. Impact of Monetary Policy in an macroeconomic models with link- Uncertain Economy” with Charles ages to the financial markets in two hosted notable Evans and Lars Peter Hansen, and a meetings held in September and May visiting scholars: Thornber Fellow Friedman Forum for undergraduates, in New York. With generous funding Ulrike Malmendier and Ken Ayotte, “Speculation, Trading, and Bubbles,” from the Arthur P. Sloan Foundation both of University of California, with José Scheinkman. The initiative renewed at the end of the year, the Berkeley. The initiative also supported also presented the “Conference on initiative awarded dissertation fund- and organized the newly-named the Handbook of Macroeconomics ing to 27 graduate students over the George J. Stigler Workshop in Volume 2” on April 23–25. course of the year. These students Economics and Policy. have produced innovative work that Health Economics Price Theory director Steven Levitt sheds light on the mechanisms by The institute hosted noted scholars in gave a popular Friedman Forum talk, which financial shocks are transmit- this field, including Michael Dickstein “The Freakonomics of Quitting,” on ted through the economy. of Stanford University, Ben Handel January 23, while the Becker Brown of University of California, Berkeley, Emerging Initiatives Bag lecture series for MBA students and Joshua Gottlieb of University of The institute is in the early phases continued with casual research pre- British Columbia. In collaboration with of expanding its research portfolio sentations from Ann McGill, Tarek faculty at the Harris School, Medical in global directions. An initiative in Hassan, Gregor Matvos, Devin Pope, School, and Chicago Booth, the insti- International Economics began with and Robert Topel. tute also developed a plan for founda- a conference on “Flows of Goods and The initiative provided research sup- tional research on health care markets Technologies in the Global Economy” port for senior faculty Kerwin Charles and is working to secure funding. April 3–4. Likewise, an initiative on of the Harris School and Matthew the Economics of Conflict will begin Human Capital Gentzkow at Chicago Booth. It in spring 2016 with a research con- The institute continued to provide also funded the work of nine early- ference cosponsored by the Harris communications support for the career researchers: Benjamin Brooks, School. Human Capital and Economic Thibaut Lamadon, Magne Mogstad, Opportunity Global Working Group.

Becker Friedman Institute | 7 VISITING SCHOLARS An Intellectual Destination for Inquiring Minds

With plenty of space for visitors in our new home in Saieh Hall, the institute welcomed a diverse group of 47 visiting scholars who gained from and contributed to daily exchanges across the UChicago economic community. Researchers hailing from Berkeley to Zurich spent time at the institute interacting with students and faculty, sharing work in areas ranging from behavioral economics to game theory. Here are the stories of just a few of those visitors.

The Economics of Migration Morten also looked at the comparative costs of commuting. If infrastructure has made it cheaper Visiting the institute in April, Melanie Morten of for laborers of a given industry to get to their job in Stanford seemed unfazed by the fierce reputa- an urban center, or on the outskirts of a developed tion of the University of Chicago’s workshops. “It’s region, what does that mean for how people match a very intellectually vigorous environment,” said to certain types of work? What does this lower Morten, who was thankful to faculty and students matching cost mean for the economy as a whole? attending the family economics workshop for giv- ing her “a great opportunity to present research in “When we look at that, we find that [lower migra- progress.” tion costs] could explain an increase in per capita income of about 20 percent,” says Morten. Morten and her coauthors are in the process of examining how where you live might relate to how That quantifies the returns on higher worker mobil- much money you make. All over the world, people ity over time, but we can also use this measure live in areas with very low wages compared to what to compare developing countries to the US. An they might earn elsewhere. Morten wants to know if American citizen’s average output is around 15 the factors that individuals use to make these deci- times that of a person living in Indonesia; by sions differ depending on where you live. Can you Morten’s measure, about ten percent of that pro- simply move a person to a richer part of the world ductivity gap can be explained by the lower mobil- and expect her to earn more? Or do low wages aris- ity costs enjoyed by US workers. ing from individual factors and decisions that would Morten hopes that work like hers will help policy- continue in a high-wage environment? makers recognize the benefits of integrated labor People elect to stay put for all sorts of reasons— markets, as well as possible side effects of misdi- common language, shared religion or culture, pre- rected regional development policies ferred weather, an optimal commute. Giving up these things are costs migrants bear along with the Explaining Bubbles actual expenses of moving. Morten and colleagues Asset price bubbles have cropped up in financial correlated such factors to detailed micro-data for markets for centuries, yet we don’t completely Indonesia and the United States from 1976 to 2012. understand how and why they arise. Distinguished That data starts to paint a picture of the costs of Research Fellow Jose A. Scheinkman has studied migration over time, and an understanding what them carefully, and offered some explanations at a causes them to change, says Morten. Friedman Forum Undergraduate Lecture.

8 | The University of Chicago Distinguished Research Fellow Columbia University’s Pierre-André Chiappori José Scheinkman

George Tavlas of Distinguished Research Fellow the Bank of Greece Thomas J. Sargent

Scheinkman outlined three observed facts about commentator. “On both sides, there are investors conditions associated with bubble episodes: they who overestimate their knowledge and therefore coincide with increased trading volume and also make decisions based on that overconfidence,” with financial or technical advances, and they burst he added. when asset supply increases. As long as the two groups have different informa- As evidence, Scheinkman cited overtrading in the tion or beliefs, the option to be able to sell to the years leading up to the 1929 stock market crash other group will always bring a higher price for the and the Internet start-ups crowding onto the stock stock than its fundamentals indicate. And the more markets during the dot.com boom. the two groups diverge, the higher prices will rise.

Scheinkman presented his model of bubble for- “That is the bubble. It is not because one group mation with two groups of investors. Group A is is more optimistic. The bubble is the value of the rational and makes decisions about investing based option of reselling to the other party in the future,” on their reading of the markets. Group B makes Scheinkman said. decisions based on the opinions of a TV business Visiting Scholars continued f

Becker Friedman Institute | 9 VISITING SCHOLARS

Costas Meghir, Stefanie Stantcheva, Yale University Harvard Society of Fellows

The Failings of Macro Models King said a financial or economic crisis could be defined as “a reaction to the realization that a big Sir Mervyn King, the former governor of the Bank mistake was made.” Many existing macro models of England, also addressed the shortcomings of “are not helpful about why the mistake or misper- models from a policy perspective in one of the ception has built up. There must be something to talks he gave as the institute’s 2015 Ta-Chung Liu explain why misperceptions could exist and why Distinguished Visitor. the correction takes a long time as well.” Standard available macroeconomic models did Students enjoyed several opportunities to hear not help forecast the last financial crisis or help to and learn from King, a policymaker and influential respond to the long-lasting recession that followed. scholar. He spoke with students in Anil Kashyap’s So what type of model would help us understand class at the University of Chicago Booth School what came before and after the financial crisis? of Business. He also spoke to a crowd of students King explored this question in an informal talk for and professionals at an event cosponsored with about 60 students and faculty members. Chicago Booth’s Initiative on Global Markets. That talk explored the relationship between currencies “Despite the biggest stimulus ever seen in the world, and nations. King later said that he much enjoyed we have seen a recovery that is very slow and left his visit to Chicago and the interaction with faculty a gap between where we thought we would be and students. ten years ago and where we are,” remarked King. Competing explanations have been put forth to King’s visit was made possible by the generosity explain the slow recovery, but they are incomplete of Ernest and Joan Liu, who established a or circular, he said. “We have to make a story with visiting scholar’s post in honor of Ernest’s father, the economics behind it to explain observed facts,” distinguished econometrician Ta-Chung Liu. he noted. “I’m trying to put the economics back The institute is grateful to the Liu family for into this.” supporting King’s visit.

10 | The University of Chicago “Competing explanations have been put forth to explain the slow recovery, but they are incomplete or circular. We have to make a story with the economics behind it to explain observed facts.”

—SIR MERVYN KING

Stefania Garetto Carolin Pflueger Quang Vuong Visiting Boston University University of British Columbia New York University Scholars Macroeconomics, Monetary policy, finance Theoretical and applied international trade econometrics 2014–15 Monika Piazzesi Joshua Gottlieb Stanford University E. Glen Weyl Dilip Abreu University of British Columbia Finance, macroeconomics Microsoft Research Princeton University Health economics Price theory, industrial Luigi Pistaferri Econometrics organization Benjamin Handel Stanford University Ufuk Akcigit University of California, Labor economics; applied Frank Wolak University of Pennsylvania Berkeley econometrics Stanford University Economics of innovation Health and behavioral Environmental economics Jean-Marc Robin and growth economics Sciences Po Tao Zha Shui-Chin Lee Fellow Kenneth Ayotte Microeconomics Federal Reserve Bank University of California, Richard Hornbeck of Atlanta Christina Romer Berkeley Harvard University Macroeconomics, University of California, Bankruptcy, corporate Economic history econometrics Berkeley finance of America Economic history, George Tolley Fellow Yeon-Koo Che macroeconomics Distinguished Columbia University Felix Küebler David Romer Research Contracts, organization, University of Zurich University of California, microeconomics Computational economics Fellows Berkeley Andrew Chesher Tong Li Monetary economics, Pierre-André Chiappori University College London Vanderbilt University macroeconomics Columbia University Econometrics Identification and inference Behavior, risk, mathematical José Scheinkman in game theory models economics Stefano DellaVigna Columbia University University of California, Ulrike Malmendier Financial markets Thomas J. Sargent Berkeley University of California, New York University Karl Schlag Behavioral economics, Berkeley Rational expectations, University of Vienna applied microeconomics Corporate and behavioral macroeconomics Modeling choices with finance Michael Dickstein unknowns Robert M. Townsend Stanford University Thornber Visiting Fellow Massachusetts Institute Karl Schmedders Health economics Albert Marcet of Technology University of Zurich Economic organization and Yanqin Fan Barcelona Graduate School Computational economics financial systems University of Washington of Economics Econometrics Macroeconomics, financial Martin Schneider TA-CHUNG LIU economics, time series Stanford University DISTINGUISHED VISITOR Jesús Fernández-Villaverde Macroeconomics, finance Sir Mervyn King University of Pennsylvania Costas Meghir New York University Applied econometrics, Yale University Andrew Shephard Monetary policy public policy Labor responses to tax University of Pennsylvania reforms Labor, public economics Drew Fudenberg Research Harvard University Melanie Morten Stefanie Stantcheva Game theory Stanford University Harvard Society of Fellows Fellows Economics of migration Optimal tax design Benjamin Brooks Xavier Gabaix Princeton University New York University Ulrich Müeller Chris Taber Microeconomics Asset pricing, Princeton University University of Wisconsin macroeconomics, Econometrics Econometrics Thibaut Lamadon behavioral economics, Isabelle Perrigne George Tavlas University College London executive compensation Rice University Bank of Greece Macro-labor, contracts, Industrial organization, Monetary policy applied econometrics econometric applications Becker Friedman Institute | 11 SAIEH HALL Chicago Economics Has a New Home

Seven years of planning, meticulous restoration, and adaptive renovations culminated in a beautiful and efficient new home for the Becker Friedman Institute and the Department of Economics.

The Saieh family tours the hall

Ann Beha and Associates transformed the 90-year- Saieh and his extended family were on hand for the old former seminary building into a modern dedication. “What Chicago has done for the world, research and educational center tailored to the for America, for Chile, and for my family is enor- ongoing tradition of intense inquiry, discussion, mous. As a family, we made the decision to support and collaboration. the department and the Becker Friedman Institute, and we feel we are privileged to do that,” he said. The institute held its first programs in the facility’s new skylit classroom in September 2014. In a joyful Saieh recalled the Department of Economics as a ceremony held October 30, the building was dedi- contentious place in his student days in the 1970s. cated as the Saieh Hall for Economics, with thanks “Everybody had different views,” he recalled. “The to the generosity of Chilean businessman Alvaro only thing they had in common was to dig deep for Saieh, AM’76, PhD’80, and his family. knowledge.”

“Years of plans, dreams, ambitions and hard work That’s still true today, President Robert J. Zimmer have culminated in the reality of this beautiful build- remarked. The UChicago economics community ing,” said institute director Lars Peter Hansen. is an extended family, and, like many, “it’s a com- plicated family. This family fights all the time,” he With space to accommodate an expanding roster quipped. of visiting scholars and programming for research- ers, students, and the public, “the institute is a true Reflecting on the number of people around the intellectual destination for the world’s best econo- globe so profoundly affected by powerful eco- mists,” he added. nomic insights born here, he noted, “It’s remark- able to think there could be so much impact from people sitting around, thinking and arguing with each other.”

12 | The University of Chicago We gratefully acknowledge the generosity of the Alvaro Saieh Family and others who have contributed to our beautiful and functional new home.

Bernard J. DelGiorno Richard and Jane Wong Hodson and Ludmila Thornber Mr. and Mrs. James B. McWethy Jeremy J. Siegel The Northern Trust Corporation

“We want to make buildings where people come together and find quiet places for discovery. We find hidden opportunities, even if underground. We want a space that is light, not intimidating, that joins the past with the future, that is up-to-date yet brings back the richness of an era when architecture cared about the little details. We find cozy spaces for the seminars, and gems waiting to be polished.”

—ANN BEHA, ON THE PROCESS OF TRANSFORMING SAIEH HALL

Becker Friedman Institute | 13 STUDENT EVENTS Preparing Future Economists Leading experts offer insights on “Big Data” and the future of social science research

University of Chicago undergraduates heard an array of views on the economic, moral, and political effects of so-called “big data” at a student-organized panel discussion held on April 10, 2015.

The panel featured economists Susan Athey of Athey noted that while economic models are Stanford University, Hal Varian of the University designed to find causality, figuring out how to fit of California, Berkeley, and statistician and machine these models to big data sets is a necessary next learning expert Larry Wasserman of Carnegie step in the field. Mellon University. “We really don’t know how to apply these tech- In their opening remarks, all three panelists noted niques to big data sets. If I have three variables, that one of the biggest challenges of big data is I can think really hard about how to specify how to draw the right conclusions from it. While my model, but if I’ve got thousands—nobody the vast pools of stored data on virtually every elec- has a theory of how a thousand variables affect tronic transaction are useful in showing correlations your outcome,” she said. “Where I’m trying to between phenomena, interpreting correlations and do research to bring these things together is to showing causality between them remains difficult. combine the best of both worlds.”

Student Research Experience Graduate Student Overview of Corporate for Undergraduates Lecture Series Bankruptcy Kenneth Ayotte, University Events in Economics Reflections on Models of of California, Berkeley 2014–15 How Big Data is Changing Stagnant Demand Economies Mervyn King, former Becker Brown Bag Series Institute events offered Susan Athey, Stanford governor of Bank of undergraduate and University; Hal R. Varian, England What Can Auctioneers Teach graduate students access Google Inc.; and Larry Us About Auctions? Evidence Segmented Housing Search to a wider range of Wasserman, Carnegie from Manheim Car Auctions Monika Piazzesi and expertise and approaches Mellon University Devin Pope, Chicago Booth Martin Schneider, Stanford and opportunities to University Selling Failed Banks build their research skills Price Theory Summer Gregor Matvos, Chicago Booth through these events. Camp Trends and Cycles in Edward Lazear, Steven Levitt, China’s Macroeconomy Who or What to Believe? John List, and Kevin Murphy Tao Zha, Federal Reserve Trust and the Differential taught the unique Chicago Bank of Atlanta Influence of Human price theory approach and Anthropomorphized to PhD students from top Spokespersons programs around the country. Ann McGill, Chicago Booth

14 | The University of Chicago The student moderators, fourth-years Kayla Reinherz added. Despite the challenges facing the use and Justin Manley, also asked the panelists about a of big data, the panelists were unanimous in prais- pressing issue arising from the ubiquitous collection ing its promise. All three agreed that this is the and unlimited storage of transactional data: privacy. most exciting phase of their careers, and that it’s a If there are no safeguards in place, data can be phenomenal time to be a scientist, economist, traced back to specific individuals. or statistician.

Wasserman demonstrated why this is such a com- They also all agreed that it’s important for big data plicated issue, saying that in order to guarantee experts and economists to learn from each other privacy, noise must be introduced, diluting the and work together to find new solutions to data data to a degree that robust analysis becomes issues. As Athey said in her introductory remarks, impractical. “You have to dissolve the amount of “This is a moment in time where social science information in the data set so much that it quickly and economics can do so many things we couldn’t becomes useless,” he said. With tensions between do before.” the statistician and internet security communities, The institute gratefully acknowledges support for the two sides of the argument seem far from this event from the CME Group Foundation. coming to a solution to the problem, Wasserman

The Power of the Street: Speculation, Trading Computable General Projection Methods and Evidence from Egypt’s and Bubbles Equilibrium and the PATH Higher-Order Dynamics in Arab Spring Jose A. Scheinkman, Solver Asset-Pricing Models with Tarek Hassan, Chicago Columbia University Todd Munson, Argonne Recursive Preferences Booth National Laboratory Karl Schmedders, University Computational of Zurich Inequality, Human Capital, Recent Advances in the Economics Colloquium and Economic Growth Computation of Equilibria Structural Approaches to Robert Topel, Chicago Booth Massively Parallel in Heterogeneous Agent Optimal Taxation Design Programming for Macro Models Andrew Shephard, Friedman Forums Economists: Challenges Felix Kübler, University University of Pennsylvania and Opportunities Millennial Goals: What’s of Zurich Jesús Fernández-Villaverde, Happened? What’s Next? University of Pennsylvania Tensor-Based Computing Nancy Stokey, UChicago in Contract Theory, IO, The Freakonomics and HJB PDE Macro Models of Quitting Victor Zhorin, UChicago Steven Levitt, UChicago

Becker Friedman Institute | 15 OUTREACH EVENTS Taking Research on the Road

In free and lively public discussions, the Becker Friedman Institute shared research, analysis, and insider views of US and global monetary policy, the response to the financial crisis and Great Recession, the slow economic recovery, and struggling labor markets.

Eight events—sometimes in different cities in the Immobility and Inequality same week—illuminated timely economic issues. In Washington, DC, Davis and Murphy focused On January 6, the Chicago Economic Society, a on long-term trends that signal distress in Washington, DC-based alumni group, hosted an labor markets. Davis started with data showing institute talk at which Steven Davis and Kevin that employment rates have been dropping for Murphy shared different evidence-based explana- American men of most ages and education groups tions for the slow-growing US economy and strug- for decades. The decline in employment for gling labor markets. Wall Street Journal reporter women started more recently. Pedro da Costa Davis moderated the talk. “This has been going on long before the Great The next night, back in Chicago, a standing-room- Recession. It says we had serous problems in the only audience of about 150 showed up on a bitterly labor market,” said Davis, the William H. Abbott cold night for a wide-ranging discussion of mon- Professor of International Business and Economics etary policy and uncertainty with Charles Evans, at the University of Chicago Booth School of president of the Federal Reserve Bank of Chicago, Business. led by Institute Director Lars Peter Hansen. Labor market fluidity, measured by the pace at which people move across jobs or positions move across employers, has also been declining since Outreach Events 2014–15 the 1980s. Reallocation on the employer side and Tax Policy and the The Role and Impact mobility on the employee side both show a bit Growth of States of Monetary Policy more than 25 percent drop in fluidity, a pattern with Rex Sinquefield, in an Uncertain Economy seen in all 50 states, all industries, and all firms, MBA’72 with Charles Evans and Lars Peter Hansen for every age, education group, and gender. Saieh Hall Open House Consequences of Presidential Economics Structural shifts in firm size, firm age, and industry Uncertainty with Edward Lazear and distribution, and an aging workforce account for with Lars Peter Hansen Christina Romer (Washington, DC) only a small share of the decline. “That leaves most Jobs, Growth and the of the phenomenon unexplained,” Davis said. Money and Nations State of the US Economy with Mervyn King with Steven Davis Is this a cause for concern? Lower job reallocation and Kevin Murphy Consequences rates mean less unemployment and less job market (Washington, DC) of Uncertainty friction. But for Davis, the downside outweighs this with Lars Peter Hansen (Paris) upside.

16 | The University of Chicago 2014 Nobel Laureate Jean Tirole

Edward Lazear and Lars Peter Hansen with Chicago Christina Romer Fed President Charles Evans

“If you do lose your job, or have a job and aren’t and declining growth, showing that the wage satisfied, it’s harder to find a new path. Co-locating differential between college and high school with a spouse or moving along a career path is graduates has skyrocketed since the late 1970s. harder. If you can’t move along a career path and College graduates today earn 70 percent more gain a salary increase that goes with it, it’s harder than high school graduates—compared to a to build human capital.” 20 percent college wage premium in 1979.

“Evidence suggested declines in fluidity are reduc- “Over 40 years, there was an expansion of inequality ing employment rates, particularly among the throughout the wage distribution and a rise in the younger and less educated. They are the ones for educational differentials. It’s not the old story of the whom fluidity is likely to be most important.” underclass, where everyone is doing okay except the poorest,” said Murphy, the George J. Stigler Complementing Davis’s data, Murphy shared Distinguished Service Professor in Economics. evidence on salaries for the younger and less educated. He offered a supply-and-demand Outreach Events continued f explanation for wage inequality, unemployment,

Becker Friedman Institute | 17 OUTREACH EVENTS

“There are a couple of ways to think about that: poorly prepared for higher ed,” Murphy said. ‘wow, that’s a big rise in equality,’ or, ‘that’s a big “Education is largely a public endeavor; we have to return on investment. It’s an opportunity,’” Murphy do what we can to respond to the challenge of pre- noted. paring a work force trained for a growing economy.”

People have recognized that opportunity and sought higher education and the rewards it Embracing Uncertainty brought. For most of the 20th century, the sup- At the “Role and Impact of Monetary Policy in an ply of skilled labor met demand. But for the last Uncertain Economy” in Chicago, Evans explained 30 years, demand for skilled workers in a modern, the thinking behind Fed policy and explained that technology-based economy has exceeded supply, his assessments are often followed by a key caveat: driving up wages for graduates. “I could be wrong about that.” With the economic While college entrance rates are strong, comple- stakes so high, Fed officials must consider differ- tion rates have declined since the 1990s. One rea- ent ways they could err and which types of errors son is because too many students are coming out would be most costly for the economy. of struggling secondary school systems and are Evans and his fellow policymakers on the Federal poorly prepared for college. And those who don’t Open Market Committee deal with such uncertainty go to college or drop out of high school have few and the very real economic consequences of being job opportunities and minimal wage growth. wrong every day. Hansen wrestles with uncertainty “People are trying to respond to labor market on a more theoretical basis, studying ways to incor- demand, but they are not very able to. They are porate it in macroeconomic models like those on

18 | The University of Chicago “There are a couple of ways to think about the rise in educational [wage] differentials: ‘wow, that’s a big rise in inequality,’ or ‘that’s a big return on investment. It’s an opportunity.’”

—KEVIN MURPHY

Institute cochair Kevin Murphy

which the Fed relies. The pair agreed that they’d One way the Fed has tried to acknowledge and like to see more acknowledgement of uncertainty reduce uncertainty is with forward guidance—state- in the policy realm. ments about how the Fed is likely to adjust policy if economic conditions in the future evolve as pre- For example, Hansen cited editorials that use overly dicted. Pointing out that forward guidance is not simplistic data to draw opposing conclusions on always so clear, Hansen wondered, “Is the point to the effectiveness of Keynesian stimulus. “There’s buy the Fed some wiggle room?” scope for the greatest divergence in opinions when historical evidence is weak,” said Hansen. Evans said that while laying out the thinking of Not acknowledging the unknown “opens the data Fed policymakers in advance does help people that’s out there to multiple interpretations, often and firms anticipate shifts in monetary policy, dramatically different opinions of the same data. the realities of keeping the market stable and In my view, it diminishes the discourse around achieving consensus among the 17 members of public policy.” the FOMC means that policy must be conditional, since it is shaped by a wide array of information. Evans agreed: “The way I would like debates like “I’m amenable to explicit numbers, but it’s hard this to carry forward would be that someone brings to do,” said Evans. their analysis to the table, and they make predic- tions, like [the Fed is] willing to do.”

He said that robust policy prescriptions should not only specify how policy should evolve if events work out as expected, but also how policy should react if predictions turn out to be wrong.

Becker Friedman Institute | 19 20 | The University of Chicago 2014–15 Financial Report

Revenue Expense In thousands of dollars In thousands of dollars

Funding Source Budget Expense Area Amount

Unrestricted Support 1,355 BFI Operations 1,811 Unrestricted Endowment Payout 665 Researcher Compensation 865 Restricted Gifts and Grants 1,965 Conferences & Research Support 1,268 Restricted Endowment Payout 599 Visitors 574

Total Current Year 4,584 Total 4,518

27% 40% Endowment Payout BFI Operations (unrestricted and restricted) 19% Researcher 30% Compensation Unrestricted Support 28% Conferences and 43% Research Support Restricted Gifts and Grants 13% Visitors

Funding Allocation to Expense Areas In thousands of dollars Unrestricted Restricted Expense Area Funding Funding

BFI Operations 1,465 346 Researcher Compensation 130 735 Conferences and Research Support 115 1,153 Visitors 310 264 Expense Total 2,020 2,498 Funding Available 2,020 2,564 Net Total 0 66

Overall, the institute underspent funding by $66,000, but this was almost exclusively from restricted sources. Unspent funding rolls over into the next fiscal year.

Becker Friedman Institute | 21 2014–15 Honor Roll of Donors The Becker Friedman Institute gratefully acknowledges these individuals, foundations, and organizations for their generous gifts supporting the institute’s efforts to advance, refine, and disseminate policy-relevant economic research.

$1 million + $10,000+ Mr. David Gerrard Dunn Anonymous (2) Dr. Stephen M. Denning Goldman Sachs & Company The Education Endowment & Ms. Judith J. Johnson Dr. Robert J. Hodrick Foundation Mr. Charles P. McQuaid Mr. He Huang & Ms. Rebecca H. John Templeton Foundation & Mrs. Monica McQuaid Li-Huang Mr. Jeremy J. Siegel James B. McWethy Mr. Matthew W. Jacobs and & Mrs. Ellen Schwartz Dr. Bernard E. Munk Mrs. Luann Jacobs* Mr. Stephen R. and Lisa S. Mr. Boyan Jovanovic $100,000 + Rigsbee Mr. Matthew Edwin Kahn Anonymous (2) Mrs. Barbara Ritzenthaler & Ms. Dora Luisa Costa* Dr. Edward R. Allen III & Mr. Lawrence R. Moats Mrs. Kay H. Kamin & Dr. Chinhui Juhn Mr. Richard O. Ryan Mr. Lawrence W. Kenny, PhD* CME Group Foundation Mr. * Professor Jisoon Lee* Mr. Donald Ray Wilson Jr. Mr. James A. O’Donnell Dr. Justin Yifu Lin Mr. Claudio L. S. Haddad Dr. Yue-Chim Richard Wong Mr. Arthur Sidney Margulis, Jr. & Mrs. Rosalie Rahal Haddad Mr. Lawrence Hilibrand & and Mrs. Elaine R. Margulis Humana Inc. Ms. Deborah Ziegler Hilibrand Mr. Paul M. Mayfield Dr. Peter D. Linneman & Ms. Susan N. Mayfield & Ms. Kathleen Linneman* $1,000 + Mr. Frederic W. Morton, Jr. Ernest and Joan Liu Foundation Mr. David Adler & Mrs. Karen S. Vrechek John D. & Catherine T. Mr. Andrew William Alford Mr. Todd Eugene Petzel MacArthur Foundation & Ms. Wei Jiang Mrs. Maria E. Pippo-Kretschmer Pfizer Inc. Mr. Yuko Arayama* & Mr. R. David Kretschmer Searle Freedom Trust Mr. Michael John Bazdarich Mr. Luis Rodriguez Mr. Edward A. Snyder* Mr. Lawrence Scott Berlin Mr. James O. Roeder Mrs. MarrGwen Chapman Dr. John F. O. Bilson Mr. Evan Schulman Townsend & Mr. Stuart B. & Dr. Laura Anne La Haye Dr. Sherman Shapiro Townsend* Mr. Joseph L.Y. Chan & Mrs. Ellen Shapiro* & Ms. Erica Liu Chan Mr. Arthur Sidney Margulis, Jr. Mr. William M. Landes and Mrs. Elaine R. Margulis & Mrs. Elisabeth M. Landes* Mr. Steven B. Weinstein Constellation Energy Group Mr. Mingde Yu* Foundation

22 | The University of Chicago Up to $1,000 Mr. William K. Haffner Mr. Benjamin Changwook Shim Dr. James Dutton Adams Dr. Ronald W. Hansen Ms. Carol J. Simon Mr. David Jerome Adelman Mr. Jonathan S. Hartley Mr. Reynold Bennett Strossen AIG Matching Grants Program Mr. David C. Healey Dr. Jeanne-Mey Sun Mr. Johnathan A. Alexander Mr. Andrew J. Hogue & Mr. Tom J. Janssens* Mr. Baird Smith Allis Mr. Robert A. Kaiser Jr. Mr. Kenneth N. Sundaresan Dr. Andrew James Aronson Mr. Benjamin Klein Dr. Pavel Svihra & Ms. Joy Svihra & Dr. Iris K. Aronson Mr. Konstantin Georgiev Kulev Mr. Matias E. Tapia Gonzalez Ms. Aasha Bharat Barot Mr. Bernard Lashinsky & Ms. Ana S. Leon Lince Mr. James Baumgardner Ms. Madeline Z. Lauf Ms. Emma G. Marquez and & Ms. Ann E. Herington Mr. Scott Lee Mr. Gordon L. Toggweiler Mr. Peter J. Boxall* Mr. Norman B. Lefton Dr. Walter John Wessels Mr. Lee A. Caplan Dr. David M. Levy & Mrs. Susan B. Wessels* Mr. Kevin Chun Chau Cheng Ms. Yuen Shan Sandi Li Ms. Anita Ka-Yin Yu Dr. Phillip Ely Church Lincoln Financial Foundation Ms. Abby M. Zarkin & Gary A. Mr. Damien De Walque & Mr. Shawn S. Loh Zarkin, PhD Ms. Celine P. Van Zeebroeck* Ms. Karen Virginia Lombard* Mr. Clare W. Zempel Dr. Dennis N. and Mary De Tray Mr. Patrick Jose Henry Mr. Harry Zimmerman Deutsche Bank Americas Reyes Malto Foundation Dr. Richard Dale Marcus *Gifts marked with an asterisk were Mr. Melchior Dikkers Mr. William D. Marder made in memory of the late Gary S. Becker. Mr. Robert J. Doyle Jr. & Ms. Donna Rhae Marder Mr. Scott David Drewianka* Ms. Deborah Ann Mason Every effort has been make to Ernst & Young Foundation Dr. Ann-Marie Meulendyke accurately acknowledge all gifts and Matching Gifts Mr. Ian M. Muir pledge payments made between Mr. John B. Faughnan Mr. Christian Michael Origlio July 1, 2014, and June 30, 2015. Mrs. Frances M. and Dr. James Pacific Mutual Life Insurance If there are errors or questions, please contact [email protected]. M. Ferguson Company Mr. Michael E. Edleson Mr. Ian William Holmes Parry* Mr. Andrew Joseph Filardo Ms. Chantelle R. Pires & Ms. Elizabeth Lynne Profit Mr. Clayne Legrand Pope Mr. Trevor S. Gallen Ms. Anisha Raj Mr. Hays N. Golden & Mr. Andrew C. Rhoads Ms. Kathleen B. Rubenstein* Dr. David E. Runkle Ms. Itir Gorguc & Ms. Patricia M. Runkle Mr. Francois Gourio Dr. John William Ruser Ms. Madeleine Sophie Mr. John Paul Salvino Greathouse Mr. Jeffrey R. and Jennifer Seaver

Becker Friedman Institute | 23 Leadership

Governing Committee Institute Research Council Becker Friedman Institute Eric D. Isaacs, Chair Lars Peter Hansen, Chair Council Provost Director and cochair, Yue-Chim Richard Wong, Chair Becker Friedman Institute Guity Nashat Becker, PhD’73 Sunil Kumar Dean, University of Chicago Eric D. Isaacs, ex officio David Booth, MBA’71 Booth School of Business Richard Elden, MBA’66 Kevin Murphy, ex officio Steven J. Davis Cochair, Becker Friedman Daniel Fischel, JD’77 Deputy Dean, Chicago Booth Institute Claudio Haddad, AM’72, PhD’74

Daniel Diermeier Fernando Alvarez Leo Melamed Dean, Harris School Department of Economics Charles McQuaid, MBA’76 of Public Policy Kerwin Charles Henry Paulson John List Harris School of Public Policy Andrew Rosenfield, JD’78 Chair, Department Richard O. Ryan, MBA’76 James J. Heckman of Economics Department of Economics Alvaro Saieh, AM’76, PhD’80 Michael Schill George P. Shultz Erik Hurst Dean, Law School Chicago Booth Hodson Thornber, AB’62, David Nirenberg PhD’66 Anup Malani Dean, Social Science Division MarrGwen Townsend Law School Don R. Wilson Jr., AB’88 Nancy Stokey Distinguished Advisory Group Department of Economics Pierre-André Chiappori Columbia University Chad Syverson Chicago Booth Edward P. Lazear Stanford University Graduate Pietro Veronesi School of Business Chicago Booth

Thomas J. Sargent New York University

Robert M. Townsend Massachusetts Institute of Technology

© 2015 The University of Chicago. Photography: Joseph Sterbenc, Rob Kozloff, Jason Smith, and John Zich Contributors: William Leddy, Robin Mordfin, Mark Riechers, Toni Shears, Amelia Snoblin, and Fareine Suarez Design: Sorensen London Design

24 | The University of Chicago

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