MIT Reports to the President 1994-95

Department of Economics

The scientific and academic activities of the Economics Department continued at a strong pace during the year. Two junior faculty appointments were made in the areas of microeconomic theory and international economics, and the Department continues to search to fill three senior positions. The Department competed aggressively this year with Stanford, Harvard, and Princeton for a new crop of Ph.D. students and was successful in attracting an excellent class for the fall 1995 term. Faculty research productivity was outstanding and the Department continues to rank highly in all surveys designed to measure the quality and research productivity of economics departments. As in previous years, members of the faculty participated actively in both national and international policy issues.


Professor Bengt Holmström, who specializes in economic theory, joined the Department as a Professor effective July 1, 1994. Professor Holmström has become well integrated into the Department and has proven to be an excellent teacher and colleague.

Glenn Ellison, who specializes in game theory and industrial organization, joined the Department as an Associate Professor (without tenure), effective July 1, 1994. Professor Ellison is an excellent teacher and very promising scholar who is helping to fill important roles in the Department.

Assistant Professor Alberto Bisin, who specializes in general equilibrium theory, joined the Department effective July 1, 1994. He is one of an exciting group of young theorists who have joined the Department in the last few years.

The Department conducted various searches to fill positions at the junior and senior levels during the year. We are delighted that Susan Athey and Jaume Ventura joined our faculty as assistant professors effective July 1, 1995. Professor Athey, who specializes in the areas of organization theory, contracts and industrial organization, received her Ph.D. from Stanford University. Professor Ventura, who specializes in international economics and macroeconomics, received his Ph.D. from Harvard. Professors Athey and Ventura were considered the most outstanding of the candidates on the job market this year.

The Department continues to be actively engaged in searches to fill three senior positions. During the year, search committees in international economics, labor economics, and economic theory evaluated potential candidates and made recommendations to the Department's Policy Committee. We expect to make two appointments in Fall 1995.

Associate Professor Ricardo Caballero, a macroeconomist, has been approved for promotion to the rank of Professor effective July 1, 1995. Associate Professor Nancy Rose, who holds a joint appointment with the Sloan School and specializes in the area of industrial organization, has also been approved for promotion to the rank of Professor effective July 1, 1995. Assistant Professor Jonathan Gruber, who specializes in public finance, was approved for promotion to the rank of Associate Professor (without tenure), effective July 1, 1995.

Associate Professor Roland Benabou has resigned from the Department to accept an offer from the Department of Economics at New York University.

Institute Professor Robert Solow has formally retired effective June 30, 1995. Professor Solow will continue to be active in his research and writing and have the title of Institute Professor, Emeritus. He will be a Senior Lecturer in Fall 1995 and teach a graduate course in macroeconomics.

Professor Stanley Fischer resigned his position as Department Head in August and took a two-year leave of absence to serve as the First Deputy Director of the International Monetary Fund. He was replaced as Department Head by Professor Paul Joskow. Professor James Poterba in turn replaced Professor Joskow as Associate Department Head.

In addition to Professor Fischer, Professor Benabou and Assistant Professors David Genesove and Michael Kremer were on leaves of absence during the 1994-95 academic year. Professor Benabou was on leave at New York University. Professor Kremer was at the Hoover Institute at Stanford University and Professor Genesove was at The Hebrew University of Jerusalem.

There were six visiting faculty for all or part of this year. Professor Jean Tirole, of the University of Toulouse, taught a topics course in industrial organization. Professor R. Preston McAfee, of the University of Texas, taught two courses in the industrial organization sequence. Dr. Roger Brinner, Executive Director and Chief Economist at DRI/McGraw-Hill, taught the introductory macroeconomics course for the spring semester. Professor Avinash Dixit, of Princeton University, taught international trade during the fall semester. Associate Professor Joshua Angrist, of the Hebrew University at Jerusalem, taught in the graduate labor economics sequence and Associate Professor Gilles Saint-Paul, a researcher at DELTA in Paris, taught macroeconomic theory in the spring semester.

The Department maintains its concern with increasing the representation of women and minorities in the economics profession. All search committees have been instructed to make a special effort to identify outstanding women and minority candidates as an integral component of their search process. This year, as part of the recruitment process for junior faculty, the Department solicited/received 228 CVs. After the first screening, 57 files were retained. Of those, 31 were women. After a second screening, 32 (of which 9 were women, one of whom was a minority) candidates were selected for interviews. All candidates were interviewed by at least two members of the faculty. Subsequently, 6 candidates were invited to come to MIT and present a seminar. As a result of this exhaustive process, two offers were made and accepted. One of these offers was made to a woman, Susan Athey.


The recruitment of graduate students continued to be highly competitive with other major graduate programs. The leading applicants for admission were invited to visit the Department, which has become common practice in all the top graduate economics departments. This year's class of 31 will include 15 international students (several of whom have undergraduate degrees from U.S. universities) and 6 women (20 percent). Twenty percent of our entering class have National Science Foundation Fellowships or Jacob Javits Fellowships to begin their graduate studies in economics.

Undergraduate enrollment increased slightly this past year. There were 106 undergraduate majors in economics (including 25 double majors) and 139 undergraduate minors last year. The total enrollment in all undergraduate subjects in economics this year was five percent greater than last year.


Faculty research continues to be intense and highly productive. Following are examples: "Asymmetric Information, Bargaining and Unemployment Fluctuations" (Professor Acemoglu); "Least Absolute Estimation of a Shift" (Professor Bai); "Word-of-Mouth Learning" (Professor Banerjee with D. Fudenberg); "Exporters, Jobs, and Wages in U.S. Manufacturing, 1976-87" (Professor Bernard with J. B. Jensen); "General Equilibrium Economies and Asymmetric Information" (Professor Bisin with P. Gottardi); The Transition in Eastern Europe (Professor Blanchard, ed. with K. Froot and J. Sachs); "Investment Dynamics: Integrating Microeconomic and Macroeconomic Data" (Professor Caballero with Engel and Haltiwanger); "Pensions and Retirement: Evidence from Union Army Veterans" (Professor Costa); "Economic Aspects of Optimal Disability Insurance (Professor Diamond with E. Sheshinski); Financial Liberalization (Professor Dornbusch, ed. with YC Park); ""The Metamorphosis of Giants: China and India in Transition" (Professor Eckaus); "Word of Mouth Communication and Social Learning" (Professor Ellison with D. Fudenberg); "Aggregate Price Indices, New Goods and Generics" (Professor Fisher); "Understanding Centralized Trading Places: A Case Study of the Portland Fish Exchange" (Professor Genesove); "Physician Payments and Infant Mortality: Evidence From Medicaid Fee Policy" (Professor Gruber); "Quitting cigarette smoking: Relapsing and trying again" (Professor Harris); "Nonlinear Errors in Variables: Estimation of Some Engel Curves" (Professor Hausman with W. Newey and J. Powell); "The Firm as an Incentive System" (Professor Holmström with P. Milgrom); "Privatization in Russia: What Should be a Firm?" (Professor Joskow with R. Schmalensee); "Assortative Marriage and the Dynamics of Inequality" (Professor Kremer); "Nonparametric Estimation of Exact Consumer Surplus and Deadweight Loss" (Professor Newey with J. Hausman); "Social Mobility and Redistributive Politics" (Professor Piketty); "Beyond Individualism" (Professor Piore); "A Statistical Analysis of Crime Against Foreigners in Unified Germany" (Professor Pischke with A. Krueger); "Capital Budgets, Borrowing Rules, and State Capital Spending" (Professor Poterba); "Necessary and Sufficient Conditions for the Perfect Finite-Horizon Folk Theorem" (Professor Smith); "A Parable of Network Disintegration: the Bell System Breakup" (Professor Temin); "Retail Sales and Retail Real Estate" (Professor Wheaton with R. G. Torto).


Institute Professor Solow received an Honorary Doctorate from the Conservatoire National des Arts et Metier, Paris, France. Professor Blanchard was named Class of 1941 Professor and was also the recipient of the Department's Graduate Teaching Award. Professor Gruber was the recipient of a Sloan Research Fellowship. Professor Diamond was elected President of the National Academy of Social Insurance and was invited to give the Doug Purvis Memorial Lecture, Canadian Economics Association. Professor Costa received the Allen Nevins Prize for the best dissertation in U.S. economic history from the Economic History Association. Professor Holmström was elected to the Council of the Econometric Society. Professors Joskow and Solow were appointed to a Presidential Economic Advisory Board and met with the Clinton Administration's senior economic policy team in December, 1994. Professor Temin is the President-elect of the Economic History Association. Professor Schmalensee, who holds a joint appointment with the Sloan School, was elected a Fellow of the American Academy of Arts and Sciences.


The Department's faculty continue to give many invited lectures, appear at conferences and perform many functions in professional groups and other public services. Professor Blanchard was the keynote speaker at the meeting of the Association of European Labor Economists in Warsaw. Professor Eckaus gave the W. Arthur Lewis Memorial Lecture, University of the West Indies in Barbados and served as chairperson of the Review Team for the Faculties of Social Sciences at the University of the West Indies. Professor Caballero is Associate/Co-Editor of the Journal of Monetary Economics. Professor Gruber was Co-organizer of Social Insurance Meetings at the National Bureau of Economic Research's Summer Institute. Professor Poterba is a member of the Nominating Committee of the American Economic Association and is also Chair of the Research Committee of the National Academy of Social Insurance.


The Department continues to receive financial support from its alumni/ae and friends. This year in honor of Professor Solow's forty five years of service to the Department we have established the Robert M. Solow Endowment Fund to support graduate students and offer an annual award for the student who exhibits excellence in both teaching and scholarship. To date we have received gifts and pledges of over $750,000 for the Solow Endowment Fund.

The World Economy Lab (WEL), lead by Professor Dornbusch, continues to play a major role in the Department's effort to raise funds to support student and faculty research. This year WEL held two very successful conferences in October (New York City) and April (Washington, D.C.) to discuss major economic issues. Participants included leaders of business, government and industry, as well as many MIT alumni/ae. The WEL is also the home for research grants from the Ford Foundation and the German government. The WEL continues to be an important source of research support for graduate students and junior faculty in the Department.

This year the National Science Foundation made new or renewal awards to several of the Department's faculty; Professors Bai, Banerjee, Caballero, Newey, Smith, Ellison, and Holmström. Professors Blanchard, Diamond, Hausman, Poterba and Rose have NSF grants that are continuing. The National Institute on Aging made an award to Professor Costa. Professors Joskow and Schmalensee received a grant from the Department of Energy (through the CEEPR) to study the sulfur dioxide allowance trading program created by the Clean Air Act of 1990. Professors Eckaus, Joskow, Poterba, and Schmalensee are involved with the research activities of the Center for Energy Policy Research, a joint activity between the Department of Economics, the Sloan School, and the Energy Laboratory. Professor Piore received a grant from the Alfred P. Sloan Foundation (through the Industrial Performance Center) to pursue his research in understanding and improving industrial performance. Grants from the Ford Foundation and the German government are continuing and are being administered by the WEL.

The Department submitted a proposal to the National Science Foundation Academic Research Infrastructure Program to provide funds to upgrade and expand the Department's computer infra-structure. A final decision will not be made until later in FY 95.

Paul L. Joskow

MIT Reports to the President 1994-95