2017 / Volume 1 / Issue 1 Cowles Q uarterly N ew sl e t t e r

PREDICTING THE NEXT PRESIDENT THE RAY FAIR FORMULA

Features JOHANNES HÖRNER Faculty Profile MARK ROSENZWEIG Q & A Cow les Quarterly Volume 1, Number 1 CONTENTS A NOTE FROM THE EDITOR ...... 3

FA CULTY FOCUS JOHANNES HÖRNER ...... 4 FROM THE A RCHIVES COWLES COMES TO YALE ...... 5

FEA TURE PREDICTING THE NEXT PRESIDENT THE RAY FAIR MODEL ...... 6

ECONOMICS FALL RECEPTION ...... 7

Q&A MARK ROSENZWEIG STUDYING GROWTH IN LOW-INCOME NATIONS Q& A ...... 8

COWLES FOUNDA TION DISCUSSION PA PERS 2016 FOURTH QUARTER ...... 10

On the cover: 30 Hillhouse Ave. Table of contents: Faculty Lounge, 30 Hillhouse Ave.

2 Cowles Quarterly A NOTE FROM THE EDITOR

Welcome to our first quarterly newsletter

When I was first tasked to produce a quarterly newsletter for the , I was honored. My flattery, however, soon turned to optimistic angst as I began to think of all the things that go into the publication. How will I format the pages? Will the pieces interest readers? Will I have enough content? And, of course, will I catch all those dreaded typos. Low and behold, the issue came together; I have a format, content, and pictures. For now, I can breath a sigh of relief (at least until the next issue).

I would like to thank Cowles research staff members, Professor Ray Fair and Johannes Horner, who volunteered their time to answers questions for the pieces on the following pages. I would also like to thank Mike Cummings for his contributing article on Mark Rosenzweig.

It is my hope that this inaugural issue will be the first of many to bring insight about the Cowles Foundation and its Research Staff to our readers. Please enjoy the next few pages and stay tuned for future issues. And 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 JOHANNES HÖRNER Faculty Focus

By Matthew Regan

T o kick off its inaugural issue, CQ catches up with Alfred Cowles Professor of Johannes Hörner for a meet and greet, Q&A faculty focus session. Hörner came to Yale in 2008 and has been a member of the Cowles Research Staff since the same year. He received his Ph.D. in economics from the University of Pennsylvania in 2000, and went on to teach at the Kellogg School of Management at Northwestern University before starting at Yale. His academic interests range from game theory to the theory of industrial organization, with his research focusing on repeated games, dynamic games and auctions. Last fall, he was appointed editor for the American Economic Journal - Microeconomics, and is currently on leave for the 2016-17 academic year visiting Toulouse School of Economics.

WHAT ARE YOU CURRENTLY attention to, and, as a strategic importantly, it's an opportunity to try RESEARCHING? person, how sophisticated lying my hand at contributing to a young strategies have to be. These but already established journal. With Nicolas Vieille, and Xiaosheng questions are important for the Running a journal is a very special Mu (a former Yale undergrad!), I am economics of information, where we business: you have to attract as currently working on truthtelling try to understand how to best elicit many submissions as possible, yet and liespotting. Mark Twain once the private information of agents. the more you attract, the more you said that if you tell the truth, you end up rejecting. To meet this don't have to remember anything. If CONGRATULATIONS ON BEING challenge, you have to be fair to the you lie, however, you must have a NAMED EDITOR OF THE authors, and add value to the papers, good memory, because you are AMERICAN ECONOMIC JOURNAL: even those that are rejected. This is bound by your past claims, and MICROECONOMICS! WHAT DOES a job done by the referees and the consistency in consecutive claims is THE POSITION MEAN TO YOU, editorial board, and the editor important for the lie to remain AND WHAT DO YOU LOOK FOR IN merely tries to coordinate their undetected. For instance, you might A PAPER FOR PUBLICATION? efforts. have thought that it was clever of you to pretend you liked ballet when Being an editor is an honor, a duty CAN WE EXPECT TO SEE ONE you first met that young and and an opportunity. It's an honor, to OF YOUR PAPERS IN THE AEA attractive person, but keep in mind the extent that it means that my OR ANOTHER JOURNAL IN that you might end up having to go peers trust my judgment and my THE NEAR FUTURE? to ballet every week for the next dedication. It's a duty, because as an I sure hope so! But it is probably forty years, if you want your lie to author, I have benefited countless best to not submit to one's "own" remain unnoticed. times from the advice and help from editors and referees; taking such a We are exploring what kind of (continued on page 5) patterns in reports one should pay position is a way to pay back. Most

4 COWLES QUARTERLY Hörner continued from page 4 journal, and the decision ultimately belongs to other editors. I have worked with Yeon-Koo Che FROM THE (Columbia) on spamming that we hope to see published soon, perhaps at the Quarterly Journal of Economics. ARCHIVES WHAT IS YOUR FAVORITE CLASS TO TEACH AND WHY?

Clearly, this has to be mathematical game theory, the undergraduate course in game theory that I teach at Yale. As every undergrad knows, this is a very hard course, but it is fun and challenging!

WHAT ADVICE DO YOU HAVE FOR UNDERGRADUATES PURSUING A DEGREE IN ECONOMICS? Take courses that you enjoy and challenge you. It's not about memorizing facts and methods. It's about discovering what works for you, how you learn best and what gets you excited. But I guess that applies to lots of fields!

Yale Daily News December 16, 1954

The announcement of the Cowles Commission move to Yale from the University of Chicago made the front page of the Yale Daily News on December 16, 1954, naming future Nobel Laureate Tjalling C. Koopmans and his colleague Jacob Marschak as accompanying members. The article states that James Tobin will become the director. Like Koopmans before him, Tobin also went on to receive a Nobel Prize in Economics.

5 COWLES QUARTERLY PREDICTING THE NEXT PRESIDENT The Ray Fair Formula

By Matthew Regan

With the 2016 presidential elections behind us (for better or worse), most media organizations and pundits predicted the outcome incorrectly. One economist, however, did make the correct call. In fact, Cowles Research Staff Member and John M. Musser Professor of Economics, Ray Fair, has quite the track record for predicting the presidential outcome with his voting formula.

I t is human nature to speculate what Fair's method looks at fundamental forces And lastly, he looks at the state of the the future holds and many people like to driving people's voting behavior rather economy during the first three quarters of make predictions. What's more, there are than asking people who they plan to vote the election year to see where output about as many formulas arriving at a for, or how and why they came to make growth and inflation stand. prediction as there are predictions. Some their decisions. Simply stated, his As it turns out, the first three criteria were may be based on scientific and analytical approach, "tries to explain what not in Hilary Clinton's favor. As for the data, while some may be purely motivates people to vote the way they last condition, while inflation was low in speculation on other factors. do." He elaborates in his paper 2016, the GDP was historically weak "Econometrics and Presidential Take for example sporting events; people despite a slight up-tick in the last quarter. Elections" by writing, "The general are always trying to pick which team will Thus, the conditions pointed to a Trump theory behind the model is that a voter win the Super Bowl, World Series, or victory. evaluates the past economic World Cup. The same holds true of the performances of the competing parties Although Fair predicted the Democrats stock market: Will it be bearish or and votes for the party that provides the would receive less votes, his results were bullish? And elections are no exception highest expected future utility." not as close as anticipated. Since when it comes to predicting the outcome; November 2014, his model had favored people instinctively want to know who Rather than relying on typical exit poll the Republicans, predicting the will be their next leader. questioning, Fair uses four conditions to Democrats to receive 44 percent of the determine voter preferences: if a The 2016 presidential election results two-party vote. Clinton, however, ended president is seeking a second term; the proved to be surprising to many people, up receiving a lot more votes, which was duration a party has controlled the White however, particularly pundits. According actually closer to 51.1 percent. That's an House; a persistent bias (albeit slight) in to the Pew Research Center, pollsters error of 7.1 percentage points. More favor of the Republican Party; the state of predicted Hilary Clinton's chances of surprising, this was nearly twice the error the economy, particularly the rate of winning to be at a whopping 70-99%! As average Fair saw over the last 9 elections growth of output (GDP) and the inflation it turns out, the actual poll numbers which averaged 3.53 percent points. rate of the previous 15 quarters leading according to research by Theodore de up to the election. Fair cannot say with certainty why he had Macedo Soares, show a 2.4% margin of such a swing in the error, but he attributes discrepancy between exit polls in favor of Each condition can be broken down for the discrepancy to Trump's personality. Donald Trump, not the expected 3.2% further clarification. His model states that "Had the Republicans nominated a more margin favoring Clinton. nominees running for a second term tend main stream candidate, they may have to have a better chance of winning. If one While political scientists and pollsters done much better---much closer to what party has controlled the White House for were left scratching their heads and will the equation was predicting," says Fair. a long duration (e.g., two terms), this is continue to pour over data develop case "The election was theirs to lose because seen as less favorable for the incumbent studies, Professor Ray Fair is once again of the economy and the duration effect, party. Fair's research also shows voters relishing in a correct prediction using his tend to lean in favor of the Republican and they almost lost it!" own model which he developed nearly 40 Party which he equates into his model. years ago.

6 Cowles Quarterly Fair says he became interested in voter behavior in the early prediction formulas. In fact, American University History 1970's while teaching at with Orley Professor Allan Lichtman, created the Keys System and has Ashenfelter who was looking for an econometrics problem successfully predicted nine presidents since 1984. assignment for his students. According to Fair, "the subject A more complete explanation of Professor Fair's model along matter is interesting, the voting equation is easy to understand, with his data from past presidential elections can be found on his and the econometrics offers practical problems." While Fair is personal website (https://fairmodel.econ.yale.edu/). not aware of his model used for other elections, e.g., gubernatorial races, he is not alone in developing presidential 2016 Fall Reception The annual Department of Economics Fall Reception was held on September 13, 2016 for faculty, Cowles visitors, and staff hosted by Chair and Cowles Research Staff Member, Dirk Bergemann.

Prof. Giuseppe Moscarini and A good time had by all Econ Chair Dirk Bergemann

Prof. John Geanakaplos and Prof. Gerald Jaynes, Visiting Prof. Andrew Visiting Prof. Dov Samet Atkeson, and Prof. Joe Altonji Prof. Steven Berry

Former Econ Operations Manger Pat Brown and Prof. Emeritus William Brainard Department of Economics and Cowles Foundation Staff

7 COWLES QUARTERLY MARK ROSENZWEIG

Studying growth in low-income nations: Q&A

By Mike Cummings

The Economic Growth WHAT ARE THE don?t manufacture Center, a research division anything? Your smartphone CENTER?S PRIORITIES? The center has a program of Yale?s Department of wasn?t made in India. We on economic history, so Economics, is one of the The center has two hear that one of the reasons we?re also committed to oldest institutions in the missions: One is the study they?re made in China is looking at things over the United States dedicated to of economic development because the wages are low long term. A lot of the studying economic growth and growth. The second is there. Well, they?re lower western world has in the developing world. It to train graduate students in India, so why aren?t they developed over time, so we was founded in 1961 to to perform this work. We made there? Is it should be able to learn promote understanding of create an intellectual governance? Is health or something from that by the issues and forces environment in which these education too low? Why studying the countries that affecting development in things can occur. The are health and education have developed and those low-income countries. center is composed of low? Is it access? Is it that didn?t. independent researchers, because people Research performed and their work is our underestimate their value? through the center covers a primary output. They have It?s easy to come up with THE GROWTH CENTER wide array of topics. research projects taking the questions. You start DEVOTES A PORTION Projects range from a study place in many countries down a path of asking OF ITS RESOURCES TO of how rainfall forecasts around the world using a questions, just like the kid COLLECTING DATA IN affect agricultural wages, variety of statistical who asked, ?Why is the DEVELOPING to a randomized methods and many types of sky blue?? COUNTRIES. CAN YOU experiment assessing the data. As director, my job is TALK ABOUT THAT effect of microloans, to an to make sure the Countries often change WORK? analysis of environmental researchers get the public policies. We can regulation in a particular resources they need to do study the effects of those We run two long-term country. this work. policy shifts. For example, panel surveys ? one in Indonesia had a school Ghana and one in the Tamil Mark Rosenzweig, the building program in the Nadu state in India. The Frank Altschul Professor of WHAT FUNDAMENTAL 1970s ? the biggest in center has an endowment, Economics, has directed QUESTIONS DO YOU world history over a and we take advantage of the center since 2006 and SEEK TO ANSWER? five-year period. We can those resources to initiate was recently reappointed to evaluate it. It turned out these long-term surveys so the role. He spoke with A fundamental question in that the amount of we can document and YaleNews about the center studying development is: schooling among the quantify growth and and his work. An edited ?How come India isn?t like population increased 0.3 development in these and condensed version of ?? Its people are years. So maybe access to places over time. It the conversation follows. just as smart. It?s a democracy. So what are the education isn?t the full provides a public good. picture of what?s barriers? You start to break (continued on page 9) it down: How come they happening.

8 Cowles Quarterly Continued from page 8

The Ghana survey has then you can ask dynamic these folks. the data to learn something completed two rounds. questions, like: How have from it. My favorite example is the We?re talking about 8,000 things changed over time? guy who was doing well, But there were no data households ? urban and For our Ghana and India and he showed me his from low-income rural. It has no specific surveys, we collect an proudest possession in his countries. The economists focus but is intended to get enormous amount of data. newly remodeled house. It studying development had as much information as If those being surveyed are was a Phillips TV still in its never had any data. With possible from each farmers, you get inputs and box because his village had no facts, they didn?t need household that seems outputs. You get the loans no electricity ? it was a to develop econometrics relevant. they?re taking and their failure of the government. skills. They basically We hope that within the savings. You give them developed grand theories And they?re not bashful span of time that a grad aptitude tests. You get their of development, which we about talking about their student is here, there is a height and weight. You?re could sit here all day and money. In the U.S., people survey being done in the going to learn about discuss. would rather talk to you field. They can get field irrigation. You?ll learn about their sex lives than The Growth Center was experience and use the about migration or their finances. The data we one of the few surviving data. The data is temporary migration. get is surprisingly accurate. institutions. In the 1970s, proprietary for two years, Think of anything you?d the center hired T. Paul and then we release it want to know, we want it in Schultz and Robert broadly. Anyone in the that survey. That?s why it HOW DID YALE Evenson ? what world can download the takes four or five hours. BECOME A LEADER distinguished them from datasets from the first two IN THIS FIELD OF everyone else in rounds. RESEARCH? development was that they FIVE HOURS IS A We visit the households. There were two other were using micro data. SUBSTANTIAL Some of these institutions doing Schultz was studying COMMITMENT OF questionnaires can take development work when health and population using TIME, WHAT?S THE four to five hours to the Economic Growth actual household data. RESPONSE RATE? complete. One of the Center started: The Food Evenson was doing advantages of studying Our response would be Research Institute at agricultural economics, developing countries is that somewhere around 90%. Stanford and the Harvard which was particularly it?s cheap to collect data People enjoy telling you Institute for Development. relevant because it?s the and the response rates are about their stuff. I?ve Both are no longer here. dominant occupation in much higher than in the surveyed a lot of farmers in They died because the most poor countries. There United States. I?ve helped India and they want to faculty moved to had always been lead a survey in the U.S. of show you everything. They consulting, which paid agricultural data. You 8,500 households ? it cost enjoy it. better. The Growth Center could use econometrics to $23 million. In India, never fell into that trap. analyze it. I was trained as where the questionnaire is People there value their a labor economist, and then The field of studying probably eight times time differently than we I saw that I could study development had died longer, the total cost is do. In most villages there development using more than 25 years ago. about $750,000. are no cinemas or shopping econometrics. That?s With the exception of Yale, centers there. There?s no because of what was there were no researchers HOW DO YOU television. They enjoy happening here at Yale. in the field. Why? The rest COLLECT THE DATA? talking to people. That?s different than here. We all of the economics A lot of the work involves have better things to do profession had moved to data collection or using than sitting down and using data. Census data data from other countries. answering silly questions became available. People That?s what?s exciting. You over the phone, let alone started collecting survey can get good new data allowing somebody into data in the United States. from these countries to try your house. Sitting down Computers led to to find out what?s going on. and talking to people is an developments in It continues over years so interesting activity for econometrics: How to use

9 Cowles Quarterly COWLES FOUNDATION DISCUSSION PAPERS 2016 FOURTH QUARTER CFDP 2066 Dirk Bergemann, Stephen Morris, "Belief-Free Rationalizability and Informational Robustness," (December 2016) [31 pp, abstract]

CFDP 2065 Dirk Bergemann, Benjamin Brooks, Stephen Morris, "Informationally Robust Optimal Auction Design," (December 2016) [36 pp, abstract]

CFDP 2064 Dirk Bergemann, Benjamin Brooks, Stephen Morris, "Optimal Auction Design in a Common Value Model," (December 2016) [34 pp, abstract]

CFDP 2063 Peter C. B. Phillips, "Homogeneity Pursuit in Panel Data Models: Theory and Applications," (December 2016) [57 pp, abstract]

CFDP 2062 Peter C. B. Phillips, Wayne Yuan Gao, "Structural Inference from Reduced Forms with Many Instruments," (December 2016) [45 pp, abstract]

CFDP 2061 Offer Lieberman, Peter C. B. Phillips, "IV and GMM Estimation and Testing of Multivariate Stochastic Unit Root Models," (December 2016) [45 pp, abstract]

CFDP 2060 Jin Seo Cho, Peter C. B. Phillips, "Sequentially Testing Polynomial Model Hypotheses Using Power Transforms of Regressors," (December 2016) [46 pp, abstract]

CFDP 2059 Shu-Ping Shi, Stan Hurn, Peter C. B. Phillips, "Causal Change Detection in Possibly Integrated Systems: Revisiting the Money-Income Relationship," (December 2016) [58 pp, abstract]

CFDP 2058 Stan Hurn, Peter C. B. Phillips, Shu-Ping Shi, "Change Detection and the Causal Impact of the Yield Curve," (December 2016) [67 pp, abstract]

CFDP 2057 William D. Nordhaus, "Projections and uncertainties about climate change in an era of minimal climate policies," (December 2016) [43 pp, abstract]

CFDP 2056 Yusuke Narita, ?(Non)Randomization: A Theory of Quasi-Experimental Evaluation of School Quality,? (November 2016) [60 pp, abstract]

CFDP 2055 Martin Shubik, ?Three Essays on the Theory of Money and Financial Institutions Essay 2: The Exchange Economy, Money, and Markets? (November 2016) [24pp, abstract]

CFDP 2054 Thomas W. Quan and Kevin R. Williams, ?Product Variety, Across-Market Demand Heterogeneity, and the Value of Online Retail,? (November 2016) [69p, abstract]

CFDP 2053 Martin Shubik and Michael R. Powers, ?Cooperative and Noncooperative Solutions, and the ?Game within a Game?? (October 2016) [35pp, abstract]

CFDP 2052 Donald J. Brown, ?Aggregation of Preferences and the Structure of Decisive Sets? (October 2016) [11 pp, abstract]

CFDP 2051 Dominik Sachs, Aleh Tsyvinski, and Nicolas Werquin, ?Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium? (September 2016) [102pp, abstract]