This NY Times piece provides insights and a photo of Larry Katz with his dog at NBER. The piece builds on a long running agenda at the NY Times to highlight that consumers often make "mistakes". The NY Times loves behavioral economics (perhaps because it creates a large opening for benevolent paternalists) and this article has that flavor. Here is the story in a nutshell;
1. Parents love their 18 year old child.
2. Child has fallen in love with a city/university based on little information --- perhaps a tour of the school, perhaps a YouTube video , perhaps friends are already there.
3. Child does not know what she wants to do with her life
4. Child does not know the causal effect of attending school listed in #2 on achieving her ambiguous life goals (see #3 above).
5. Child has choice between UCLA (very very good "cheap" public university) and Ivy League School (higher price and higher prestige).
6. Middle class parent bankrupts himself paying for Cornell over UCLA and later regrets the choice.
Does capitalism work in a one shot game? Kids only go to college once.
The 6 items I list above bundle several structural issues in modern economics.
1. altruism within the family and the benevolent parent transferring human capital rather than a bequest at his death to the child.
2. Choice under uncertainty where the uncertainty is over the kid's preferences and the quality of the match between the kid and the school
3. Uncertainty over occupation choice and over the future of the macroeconomy (will Wall Street continue to boom).
4. Labor economics is all about estimating causal effects of specific treatments. Will attending Harvard raise your probability of getting a job at Facebook by 9 percentage points?
5. How do we compare apples (UCLA) and oranges (Cornell)? What are the finite set of attributes used to describe each?
6. Financing investments is a major topic in modern economics whether it is financing human capital or a house or a new road. Which investments pass a "cost-benefit" test? and how do we measure such investments under uncertainty and when the consumption factor (my kid is an "ivy leaguer") is part of the dividend flow.
This article really highlights the importance of the structural econometrics research agenda. I haven't even mentioned the supply side. Why is the supply of slots at excellent universities so vertical? Why can't new excellent universities be created by the large number of billionaires in the world? Is the supply of professors who can teach and do research really so limited? What is the scarce resource that reduces entry such that the Ivy League keep their monopoly?
