Departmental news

Dr Nathan Canen joined the Department of Economics in April 2023. Here he discusses his work in the areas of political economy and econometrics, and what attracted him to join the Department.

What research projects are you currently involved with?

My research can be broadly categorised into two fields. The first one is political economy, which studies the role of politics in shaping economic policies and outcomes. The second one is econometrics, which studies statistical methods for economics problems.

Within political economy, my main research projects focus on the organisation of political parties and the use of information by citizens, voters and politicians. For example, I have been studying sources of political polarisation – which is the divergence in political behaviour across party lines. This is a fascinating question given its relevance and implications for policymaking. But it is also deceptively hard to answer: politicians may diverge in their behaviour because of their ideologies, or because opposing parties are effective at convincing them to behave in a certain way. Disentangling these explanations requires careful use of economic theory and data. With new methods, we find that a party’s effectiveness at corralling its members has been an important driver of polarisation in politicians’ behaviour in the U.S. over the last few decades.

As researchers, we typically do not observe what drives legislative or citizens’ behaviour. Instead, we must infer those explanations from outcomes (e.g. how politicians vote on bills, what committees decide to approve, what news citizens view on TV). Quantitative answers to these questions often involve nonstandard datasets (e.g. network relationships among politicians), computationally intensive methods or theoretical properties making them hard to quantify (e.g., our theoretical models may have multiple solutions). Most importantly, we cannot easily ’randomise’ treatment to evaluate alternative political systems and institutions. My research in econometrics addresses these challenges by providing new statistical tools designed for the political economy problems I work on. By carefully thinking through the type of assumptions in such contexts, we can develop better suited estimators and statistical tests.

Why did you choose this research field?

I have always been fascinated by the interaction between politics and economics: it was my main interest during my undergraduate degree! As I continued within the field of economics, I learned more about political economy and became even more passionate about it. I particularly liked its emphasis on thinking through the feasibility of desirable policies. This led me to my PhD at the University of British Columbia, where I worked with my amazing supervisor and co-authors. My first paper studied networks in Congress: how politicians choose who to work with to craft and pass bills.

While I was working on those topics, I found myself facing methodological challenges that required new tools. For example, data about politicians’ networks cannot rely on commonly used statistics, which are built on assumptions of independence across observations. So, I continued to take econometrics classes and think about how I could improve the statistical approaches in my political economy papers. I was then very happy to be able to co-author with econometricians interested in the same types of statistical problems. The rest is history!

What are you planning to work on next?

On the political economy side, I am starting a research agenda on the role of deliberation in decision-making in committees. Many important regulatory bodies use advisory committees when making decisions. For instance, regulatory agencies in healthcare (e.g., the Food and Drug Administration (FDA) in the US or the Medicines and Healthcare Products Regulatory Agency (MHRA) in the UK) use such committees when deciding whether to approve a new product. Congressional and parliamentary committees also perform similar information gathering.

These committees deliberate before making a final recommendation. Their deliberations can be based on existing information, but committee members can also request additional information. Hence, they may act strategically to learn more information, with a goal of influencing (e.g., persuading or convincing their peers), thereby influencing the committee’s decision. In these projects, we use transcript data from FDA Advisory Committees. We transform this data in a way that can be quantified within a theoretical model of learning in committees. Then, we evaluate the role of individual preferences, information and strategic incentives in driving committee-level outcomes and compare their performance to alternative institutional designs. We are hopeful this will lend insights into evaluating the performance of these institutions.

On the econometrics front, I have become interested in the assumptions needed for counterfactual analysis (i.e. the evaluation of policies that have yet to be implemented). For example, how do we evaluate the effects of a future minimum wage, when that minimum wage has yet to be observed? Making these predictions is a hard statistical problem. Typically, researchers may use a theoretical model and assumptions to provide reasonable estimates. However, some of my recent results suggest that researchers may not need all of those assumptions, making their results more ’robust’.

What impact do you hope your work will have on society?

Broadly speaking, I hope my work shows the need for nuance in policymaking, and how theory and data are helpful. It is often tempting to make a conclusion based on a striking figure or descriptive evidence. However, when analysing individual actions – such as in politics – those answers may not faithfully represent actual behaviour or mechanisms. Hence, even well-intentioned policies may have different effects depending on what type of incentives are given.

For example, whether political polarisation is being driven by party organisation, rather than politician ideologies, matters for which policies get approved. Whether voters are demanding too little information, or just not having access to it, further changes the way we think about similar questions.

On the regulatory committees side, we hope that our work will help inform the way such committees are designed. This may include how the committees are composed, rules on what type of information they receive, and recommendations on when they can call a vote. While actual changes to committee design may take time, our findings have potential to help improve decision-making: for example, have products been approved that should not have been, and is that due to the way committees are designed?

Why did you join the Economics department at Warwick?

The Economics Department at Warwick is an incredibly dynamic, stellar, and vibrant community for economics. In fact, I was already familiar with much of the work being done at Warwick, especially within my research fields. There is world-leading research being done across the Department and in many fields. I can interact with cutting-edge theoretical and empirical, applied and technical research, with amazing colleagues and staff. This dynamism is also present through the ambitious work conducted by both staff and students, active visitor series, opportunities for presentations and conferences, among others.

An essential part of Warwick’s edge, though, is its collegiality: staff and students are incredibly warm, providing an environment that is ideal to collaborate. This allows us to exchange ideas across fields and methods which, I think, really helps break ground on new contributions. I am particularly grateful to all colleagues, support staff and students who have made me feel so welcome. All in all, Warwick is a very exciting place to be in and I am looking forward to contributing!

Nathan Canen is an Associate Professor in the Department of Economics. View his staff profile.

We caught up with Professor Jeremy Smith to ask him a few questions about being Head of Department (HoD), a role he has held since August 2016 and from which he will be stepping down at the end of July 2022.

Q1: You will be stepping down from the role of Head of Department at the end of July, so it's a good opportunity to reflect on the last 6 years. What was your first year like as a HoD?

It was a massive learning curve and one I do not think I was prepared for, despite having been acting as Deputy Head of Department for 4 years previously. I was very reliant on other people - Robin Naylor (as Director of Studies), Sascha Becker (as Deputy Head of Department) and Sarah Duggan (as Department Administrator) were immensely helpful. I have also been greatly assisted by Gill Gudger and the Senior Management Team during my time as HoD.

When I took on the HoD role it was on an interim basis for one year, while the University looked for a permanent replacement, and I didn't mind a short-term challenge. But as we all know 12 months turned into 6 years!

Q2: Could you tell us about one of the highlights of holding the position of HoD?

There have been many highlights and identifying one is very hard for me. However, it was a privilege to have hosted the Royal Economic Society Annual Conference at Warwick in 2019 when we welcomed onto campus more than 700 academic and professional economists from across the globe to present research developments in economics and showcase their real-world applications.

Q3: What has the role of HoD meant to you?

I have been immensely proud of having been Head of Department for the last 6 years. To represent this great Department both within the University and more broadly is something I never imagined myself doing.

I think it is clear to anybody that knows me, that I am not a natural in the role and do not like many of the activities that one might associate with a HoD. But when I look back on my time I think I can look myself in the mirror and honestly say I could not have tried any harder and that is enough for me. When I reflect on whether I was a good or effective HoD that is for others to determine.

Q4: What has been your proudest achievement as HoD?

The REF 2021 we obtained earlier this year, where we came 2nd in the UK for research excellence, is my proudest achievement, but not because of what I did, which was minimal. Credit is really due to Ben Lockwood, Carlo Perroni, Claire Gerard, Liz Davies and Sarah Duggan for putting together a fantastic submission. The REF 2021 made a difference to how people see Warwick Economics within the University and I hope within the country (and maybe even more widely). The outcome of the REF is with us for the next 7 years or so and therefore the returns to this achievement are high.

Q5: What was the toughest challenge you had to deal with?

Undoubtedly it was the first 12 months of the Covid pandemic. Adjusting to online exams, trying to move teaching over into an online environment, and thinking about how that might look for economics and what we needed to do to support the students who would naturally find it challenging to adapt to this way of teaching and learning. I think we as a department did as good a job as we could have hoped for, and I was immensely proud of what we managed to achieve during that time, due to commitment and effort put in by Module Leaders/Lecturers, Programme Managers, all teaching staff and all PSS staff. It has been a time of intensive work for all of us in the Department and I know that colleagues spent innumerable hours helping to design and deliver teaching and other activities (e.g. virtual open days, webinars, extra webpages and communications to students) during the pandemic. However, praise needs to go especially to: Lory Barile, Caroline Elliott, Robert Horton, Elizabeth Jones, Robin Naylor, Jennifer Smith and Kelly Taylor. I am eternally grateful to these people for supporting me and spending extra hours helping design a way through the pandemic.

The last 12 months have also been a challenging time, but where we have faced different challenges from the previous academic year. Again, the Department came together to help us get through the year.

Q6: Despite having a busy schedule as HoD, you have continued to teach EC124 (Statistical Techniques B), EC125 (Computing and Data Analysis) and EC226 (Econometrics). What has been your experience of balancing teaching and management responsibilities?

To be honest the only thing that has kept me sane at times has been the teaching as it forced me to think about something else for at least a few hours every week. What was more of a problem was preparing asynchronous lectures at a time when there were many other things going on and time was rather limited.

Q7: How do you combat stress and maintain a good work-life balance in a busy role?

I love sport. Unfortunately, I am not very good at it, but playing football against the MSc students on a Sunday, volleyball on a Wednesday and ultimate frisbee on a Friday means that, if time permits, I get out from in front of a computer sometime over the course of the week.

Q8: Do you think that the pandemic has changed the higher education landscape forever, or would we go back to the pre-pandemic environment for teaching and learning?

I do not think we will go back to education as it was before Covid. I am not sure what education will look like two years down the line, never mind about 10 years hence. I think the way students interact with education has changed over the pandemic, although some of this has not been in a way which I believe is good for cohesion of the cohort or even for the existence of a community. I believe this will be a challenge going forward.

Q9: The Department has continued to be ranked highly in league tables, which recognises the high quality of research and teaching within the Department. How do you motivate staff to give their best?

I think staff motivate themselves. I work hard and try to get involved in all activities and hope that staff follow suit. What is important for me is getting the right staff in place and then everything else will be relatively straightforward. We have a great set of colleagues in the Department and that should mean that we'll be able to maintain the high quality of research and teaching in the Department.

Q10: You have encouraged new initiatives to make the discipline of economics more diverse and inclusive, for example, the Department's Athena Swan Charter application which was successful in 2021. How important is it for you to receive this recognition?

Achieving Athena Swan award is very important for the Department and is recognition of our commitment to gender equality and the time and effort that colleagues have invested in trying to make the Department more inclusive. I'm grateful to all colleagues who have contributed, in particular Michela Redoano, Lisa Hayes, Robert Horton and members of the Department's Wellbeing, Equality, Diversity and Gender Group (WEDGG) who led the submission. The application presented evidence of how we have embedded the principles of gender balance and equality into key areas of our work, including student and staff recruitment, opportunities for professional development and progression, and improving the quality of the working environment. While we have come a long way, our work in this area will continue to progress further in the coming months and years as part of our detailed Athena Swan Action Plan.

Q11: You encouraged the Department to develop and commit to a set of values (respect, integrity and accountability). Why was it important to do that?

I was taught by my parents to be respectful of others and to accept people for who they are and try to see the good in people. I have tried to live by the example set by my parents.

We aim to foster an open and inclusive environment in the Department where everyone is treated with respect and dignity. We all have a personal responsibility to commit to these values and hold ourselves accountable.

Q12: What advice would you give to your successor?

It is essential to have good people around you and recruit well into positions in the Department. Then I would encourage my successor to delegate, something that doesn't come easily for me, but is essential in this role.

The second piece of advice is not to take things personally when things don't go according to plan. I wish Ben every good fortune - he will be surrounded by a great team who will support him.

Q13: What is next for you personally?

Next year I'm Director of Undergraduate Studies. I will do my best to fill Elizabeth's very big shoes for one year and then will hope to pass the role back to her.

I hope to also get some time to remember how to do research and have some plans to work on HESA data looking at outcomes of university students from disadvantaged backgrounds.

Q14: Finally, how do you wish to be remembered as a HoD?

I would like to hope that during my time people felt they worked in a positive and supportive environment, which encouraged them to do good work, and that their good work was acknowledged.

Professor Jeremy Smith, thank you for the interview.

Dr Dita Eckardt joined the Department of Economics, University of Warwick in August 2021. Here she discusses her work on training and skills in the labour market and what attracted her to join the Department.

What research projects are you currently involved with?

My research focuses on policy-relevant topics in labour economics, and I am particularly interested in questions around workers’ training and skills. I also do methodology work in applied econometrics, with the goal of applying new methods to empirical questions in labour and applied microeconomics more broadly.

The aim of my current work in labour economics is to better understand what kind of skills workers require to work in different occupations, how they acquire these skills, and how flexible they are in their choice of occupation after training in a particular field.

To make progress on these questions, I have been working with data from the German apprenticeship system. This is a context where young workers get trained in specific occupations, so it is straightforward to see whether a worker has ended up in the occupation they got trained in or not.

The first question I wanted to address is whether moving to an occupation different from one’s training means that workers earn less, potentially because they lack some of the skills relative to their co-workers with the ‘right’ training. Interestingly, it turns out that there is such a penalty, and that the penalty grows the more different the tasks in the occupation are to those in the original training. At the same time, the workers who switch out of their field are particularly good at what they move into. Intuitively, they compensate for their lack of training with more occupation-specific ability.

Why did you choose this research field?

My initial motivation to choose this research field was very much a genuine interest in finding answers to the question of what happens if workers are trained in one field but work in another. I became interested in this topic while studying as an undergraduate in the UK. I noticed how many of my friends were studying specific subjects with the intention of later entering occupations in other fields. This got me thinking about the specificity of skills that students learn and what this implies for flexibility in the labour market.

The fact that there are important implications for real-life policy was another key motivation.

Once I started digging deeper, I also realised that there were a range of interesting econometric challenges associated with this research field. In particular, workers are not randomly assigned to a training or an occupation, and they make their training and occupation choice based on characteristics that are unobservable to the researcher. It is important to find ways to address this kind of selection in the econometric analysis. Given that there are many trainings and occupations to choose from, this is a very challenging exercise.

I believe it is this combination of important big-picture questions and technical challenge that I have enjoyed while working in the field.

What impact do you hope your research will have on society?

There are several policy implications from the findings in my work. In particular, my findings have shown that many workers cannot fully put their skills to use in their current occupation, and that not having the right training can lead to lower productivity and wages.

A concrete policy implication from this is that retraining programmes may be worthwhile for some of these workers. In fact, it turns out that many workers choose an occupation different from their training relatively early on in their work lives. These individuals have many years in the labour market ahead of them and as a result, retraining programmes can pay off, even though there are sizeable short-run costs to retraining.

Another policy angle is around the reasons behind choosing a type of training that is no longer optimal later on. One important factor is unexpected changes in the labour market, which may lead to better opportunities in other occupations. Another factor is a lack of information about one’s own skills when choosing training. A key question relating to this is to what extent government programmes (such as internship programmes and workshops) could support young workers in making better choices, leading to less switching at a later stage. I am hoping that my research will help inform this debate.

What are you planning to work on next?

My next steps in this line of research are to take the findings and explain other phenomena in the labour market. For instance, young workers graduating into worse macroeconomic conditions have been shown to suffer from persistent wage losses. I am interested in analysing to what extent the inability to match their skills to the right occupations can explain these findings.

Besides follow-up projects within the context of the German apprenticeship market, I am also planning to start working on related questions in the UK in the near future.

Why did you join the Economics Department at Warwick?

The Economics Department at Warwick offers a great working environment. The quality of research in my broad field of applied microeconomics is excellent, and this was definitely an important factor for my choice. Warwick Economics is also a relatively big department, so there are colleagues working in pretty much all areas of economics. This makes it a very vibrant research community. We get many chances to present and discuss our work with colleagues which is particularly great as a junior researcher, as it is these interactions that really make a project develop and improve.

The Department of Economics is also an extremely welcoming workplace. As newcomers this academic year, we have been included in Departmental activities pretty much from day one and we also regularly meet up for social events on and off campus.

Dita Eckardt is an Assistant Professor in the Department of Economics.

See Dr Eckardt's staff profile

Dr Amrita Kulka joined the Department of Economics, University of Warwick, in September 2021. Here she discusses her research on improving housing affordability and what attracted her to join the Department.

What research projects are you currently involved with?

Currently, the main strand of my work considers ways of improving housing affordability. Particularly, I think about how zoning regulations – regulations that stipulate what kind of housing and how much housing can be built in different areas – affect house prices and rents as well as the supply of different kinds of homes such as apartment buildings or single-family homes.

In work that focuses on single-family homes in North Carolina, I find that stricter zoning regulations in the form of larger minimum lot sizes for residential homes lead to segregation of households into different neighbourhoods based on income. Wealthier households live in larger, more expensive units in more tightly regulated neighbourhoods, while poorer households live in neighbourhoods with a relaxed level of the regulation. In this way, minimum lot sizes contribute to spatial income inequality. Allowing more density and smaller residential units in tightly regulated areas can lead to neighbourhoods that are more mixed in terms of their residents’ incomes, thereby broadening access to services and amenities in those areas.

In related work, we investigate how different zoning regulations in and around Boston interact with each other in different areas and how they interact with other aspects of local regulation such as the form of local town governance and other housing programs. Relaxing regulations that affect the maximum number of units allowed per acre seems to be most successful at increasing the supply of both apartment buildings and single-family homes as well as at reducing prices and rents. While the potential for increased affordability is highest in Boston’s suburbs, we find that price reductions are likely due in part to current homeowners having a distaste for increased residential density in their backyard. This indicates that the resistance to building, for example, more multi-family homes might be largest in areas where affordability could increase the most.

A second strand of my research broadly considers whether policies targeted at specific locations can revitalise areas and improve economic outcomes of the local population. One example is work that we do on shortages of primary care doctors in rural areas in the United States. Rural populations have significantly worse health outcomes compared to their urban counterparts – often in terms of diseases that are avoidable with sufficient preventative care. This is often due to an undersupply of primary care doctors. We find that programmes reducing student debt for physicians in exchange for working in underserved communities are not successful in increasing the number of doctors in rural areas. Doctors taking up the programme move away once its duration ends, meaning that long-term increases in rural doctors are moderate. Rather than paying physicians monetary incentives, a more promising avenue to reducing the rural physician shortage seems to be to attract doctors who are themselves from rural areas to return to their home localities.

Why did you choose this research field?

I work at the intersection of urban and public economics. I became fascinated with urban economics through my prior interest in how individuals and households choose where to live and move across countries and cities, as well as how government policies can foster the integration of recent immigrants or incentivise relocation. From there, I became increasingly interested in studying research questions at the local level within cities.

From my perspective, studying cities is fascinating for two main reasons though there are of course many others! Firstly, the place where we grow up, where we work and live, matters tremendously for access to education, to healthcare, to networks and to amenities such as supermarkets, green spaces or even clean air. Many of these attributes vary significantly within cities, giving rise to spatial inequality and highlighting the importance of hyper-local neighbourhoods. Therefore, I think that understanding which factors determine who lives where and what barriers exist to mobility is crucial if we want to develop policies that reduce inequality.

Secondly, cities and dense forms of living provide amenities that households enjoy and allow firms to benefit from agglomeration effects by locating themselves near other firms. Learning about the benefits (and costs) of living in highly dense areas also allows one to consider whether some of these benefits can translate to places that are not superstar cities. This can aid in thinking about reducing inequality between regions. The improved availability of extremely fine-grained geographical data in recent years means that we can now finally answer many questions about cities, which makes urban economics an exciting and dynamic field!

What impact do you hope your research will have on society?

Most of my research is motivated by questions that are important for real economic policymaking. Specifically, I try to answer how different kinds of inequality (e.g., inequality in access to housing, health, education) can be mitigated through government interventions. Since these questions have very direct consequences for society, I enjoy discussing my research with a broad audience including policymakers and community organisations.

I hope that my work on housing affordability informs current policy debates around whether and where to relax zoning regulations to allow more housing to be built and to make housing more affordable. Such debates are currently being held in different local and state governments across the United States. In the UK, similar debates are held, for example around increasing the density of existing housing stock and increasing housing supply across the country.

Understanding how relaxing zoning regulations can be one policy lever (alongside other policies such as housing vouchers) to increase housing affordability has strong implications for spatial inequality. For example, allowing more housing units near suburban train stations and important transit stops can broaden access to these neighbourhoods for households from a wider range of incomes, together with providing efficient commutes to workplaces. As income is often correlated with other factors such as race and immigrant status, generating a larger stock of apartment buildings and more affordable homes also has implications for integrating communities.

Why did you join the Economics Department at Warwick?

One of the main features that drew me to this department is the range of knowledge and subfields of Economics that is represented here as well as the breadth of empirical and theoretical methods that researchers at Warwick use in their work. As is the case in my work, many researchers at Warwick also think and collaborate outside of the boundaries of their own subfield. Doing work at the intersection of two or three main fields is common and encouraged. This leads to active discussions across fields that I believe make us all better economists.

The Department especially fosters junior scholars by placing an emphasis on mentoring and offering various platforms to receive feedback internally. The CAGE Research Centre is also a great resource that provides a space for taking the policy consequences and applicability of our academic research seriously and for engaging in dialogue with policymakers. Finally, what really sets the Department apart is its collegial and warm atmosphere in addition to the excellent research done here.

Dr Amrita Kulka is Assistant Professor of Economics at the University of Warwick.

What academic projects have you been involved in recently?

I am currently involved in editing a series of books that provide practical advice on how to teach. This is in association with my previous institution, Aston Business School. The first book with advice on how to teach and how to assess students imaginatively was published by Edward Elgar in autumn 2019. We are currently editing the follow up book which focuses more specifically on the use of games, simulations and playful learning in Business School settings, including economics and law. There are plans for two more books on teaching and assessing corporate social responsibility and enterprise and entrepreneurship.

Separate to my teaching pedagogy work, I am also interested in the economics of education, alongside my research as an applied industrial economist. Having previously published on the impact of a well-known UK competition policy case that concluded that fifty leading independent schools had operated an illegal price-fixing cartel, I am now working on a project with co-authors that considers the determinants of independent school efficiency. This work is still linked to industrial economics, as we consider the impact of formal and informal school coalitions as well as competition between schools as potential determinants of school efficiency.

You are Deputy Director of the Economics Network. What does this work involve?

I've worked with The Economics Network since its inception, having been an inaugural winner of the lecturing prize for the national Economics Learning and Teaching Support Network, the pre-cursor to The Economics Network. For the past few years I have been a Senior Associate of the Network and became Deputy Director in early 2020. For many years I have helped organise and contribute to the Early Career Lecturer and Graduate Teaching Assistant workshops that take place each year. I'm continuing with this work but of course the additional challenge this year is that all the training is taking place online, and we need to provide training for colleagues online and potentially in person teaching. This is a really rewarding part of the role as it offers an opportunity to help encourage, support and hopefully inspire the next generation of university economics lecturers across the UK and increasingly internationally, too. I am a regular contributor to The Economics Network teaching resources including the online handbooks, and I am currently part of the team hoping to obtain funding to create resources to support more inclusive economics curricula.

What impact do you hope your work will have on society and the teaching of economics?

Ultimately, I hope that my work will inspire other academics to realise how important and rewarding economics teaching and lecturing can be, giving peers the confidence to experiment in their teaching. Throughout my teaching career I have experimented with the use of games, technology and different forms of assessment, and I hope that this keeps the teaching and learning 'fresh'. Meanwhile, I would like students to appreciate that economics and economic decision making is always all around us. In short, I simply want to pass on my curiosity and enthusiasm for the subject.

What brought you to Warwick?

I had always admired Warwick's research reputation and in recent years I had increasingly admired its reputation for very high quality economics teaching, too. My previous role was as Deputy Dean of Aston Business School and while there were many enjoyable features of the role, it was purely a managerial role. I came to Warwick for the Developments in Economics Education conference in 2019, organised by The Economics Network. Listening to presenters talk about their teaching experience and innovations, I appreciated just how much I personally missed teaching. Once I understood the nuances of the campus's car parks while attending the conference, I realised also what a great environment the campus would be to work in.

Why did you decide to become an economist?

All through my childhood I wanted to be a professional musician. I still remember clearly the school assembly when the Headmaster asked us who wanted to apply to Oxbridge. It suddenly occurred to me that actually I was much better in my A level Economics studies than I was in my musical studies. I applied and got into Oxford University to study Politics, Philosophy and Economics but throughout my degree it was always the economics part of the degree that I enjoyed the most. As I was finishing my undergraduate degree I knew instinctively that I still wanted to study Economics in more depth. I felt the same after completing my Master's degree and that interest in understanding economics better never dissipated, even after studying for my PhD at the University of Manchester. I rather suspect that my family never understood this, always hoping that I would instead choose to get a very well-paid job applying my economics knowledge in the private sector.

What is the next challenge for you?

The next challenge most definitely is becoming an effective online lecturer. Having looked forward to the return to teaching, it is strange to think that my first teaching will be sat in front of my computer rather than in a large lecture theatre where I have l always enjoyed enthusing the students. But I have embraced the challenge and look forward to meeting and engaging with the students on digital platforms.

About Professor Caroline Elliott

Caroline Elliott joined the Department as a Professor of Economics (teaching focussed) in September 2020. She is also the Deputy Director of The Economics Network. She was previously Deputy Dean at Aston Business School, and prior to that worked at the Universities of Huddersfield, Lancaster and Manchester. Her research interests are in applied industrial economics, cultural economics, education economics and teaching technologies.

For further details of her publications please see her staff profile: Professor Caroline Elliott.

What projects are you working on at the moment?

I’m one of the more externally engaged members of the department – I have at least two other jobs – maybe three! As a Turing Fellow I do a lot of things on data analytics, ethics and algorithms. I’m also affiliated with various think tanks – I used to work for RAND/RAND Europe and still do some projects with them, for a policy consultancy in the Netherlands and directly with the European Commission and Parliament. I also participate in Warwick-based research with colleagues from e.g. the Medical School, Mathematics and the Cyber Security Centre.

I’m just starting a project on product safety standards in a globalised environment - the regulatory picture is confused because online purchases can appear to be located within a particular regulatory space, such as the Single Market, when they are not.

Other projects with which I am involved concern ‘internet of things’ devices, where product safety refers both to the physical device and to the way it is used. What cannot easily be observed or monitored – and a major headache for market surveillance and other authorities - are the software that runs on those devices and the data they collect and process. Software, for instance, is push updated without users’ knowledge. But that’s not the end of the story - Alexa, Siri and their ilk listen to you and learn from what they hear in ways that are not audited or explained and which may not be audited or explicable.

I’m also an economist member of the government’s Regulatory Policy Committee, which is tasked with scrutinising and validating impact assessments of new regulations – expected and attained burdens on business, consumers and society as a whole. The objective is “Better Regulation” – decisions that take into transparent and proportionate account complete and robust evidence, objectively analysed. I’m in my second four-year term and get to see all significant regulations and activities of regulators. I don’t do the impact assessments themselves, but scrutinise them to see whether they are fit for purpose. As a result, I also work across government and internationally to develop and improve better regulation frameworks and impact assessment methods. Recently, this has involved international collaborative governance and impacts on trade, competition, innovation and the environment.

I’m just editing a book (in which I wrote 8 chapters) based on an EU-US project looking at collaboration on 5G, Internet of Things/cyberphysical systems and big data and AI.

Another line of work concerns ‘evidence-based’ policy; even before Covid-19, many important bits of legislation are highly controversial precisely because of their expected impacts and the quality of the analysis supporting them.. I’m currently writing a paper on how practice came to differ from the ideal picture assumed in the frameworks and how things might be rebalanced. One example concerns (ex-post) evaluation; there is a tendency only to collect and analyse evidence on things that were initially expected to be significant and many emergent or simply overlooked aspects are missed. Unintended consequences become unmeasured consequences. Additionally, political reality ensures that the people who knew and cared about the policy have been rotated out or focus on the current crisis or big idea, so institutional dementia sets in. The same mistakes get made time and time again.

I’m particularly interested in the impact of algorithmic decision-making in economic contexts from financial trading to price-setting e.g. for airlines or holidays (remember those?). One example is algorithmic collusion; if you and I are competing and pricing dynamically, I will use feed information about your prices to a revenue management algorithm to set my prices. One approach is reinforcement learning, which uses a model plane and a data plane. Exploitation phases when I use the model to set (currently) optimal prices are interspersed with exploration phases when I vary my prices to learn about the current state of the market, adjusting the model to improve a specific objective . If only one firm uses this approach, it will learn its residual demand curve; if many firms do this (ignoring each others’ learning), even fairly simple models can converge to super-competitive prices (albeit often short of the monopoly price). This is not generally illegal, since there is neither communication nor intent to collude. We just use algorithms that prove profitable. But regulatory economics should consider whether this should be illegal, how it might be detected and what can be done to prevent associated harms.

This convergence is most likely – in a model where firms ignore each others’ learning -if they all use profit as the objective that guides reinforcement learning, though this depends on the network structure of firms’ market (and observational) interactions – which firms’ prices do I observe and which firms’ behaviour affects my profits (these need not be the same). But a really interesting phenomenon is that changing the objectives of only a few firms (in critical network positions) to include consumer surplus as well as profit can lead the whole system to converge to much more competitive behaviour. We don’t have to force virtue on everyone – we can work with evolutionary and learning processes to improve compliance and competitive health. New research on trophic coherence, led by the Warwick Mathematics Department, will further develop methods for understanding this automated interplay of structure, conduct and performance.

This has lessons for e.g. banking regulation, where standards for network structure and algorithmic practices can promote resilience and stability while inhibiting tacit collusion – and do this using fairly effective, light-touch and ethically robust alternatives to coercive controls. [This is not a panacea; models in which firms take account of each others’ learning are considerably less reassuring]. But ultimately, the direction of travel is towards innovative, light touch regulation, and a better way of understanding how policy is likely to play out in practice, which is – or should be - of direct use to those who design and implement policy.

I’m just editing a book (in which I wrote 8 chapters) based on an EU-US project looking at collaboration on 5G, Internet of Things/cyberphysical systems and big data and AI. One interesting aspect concerns ‘next generation’ free trade agreements that pay considerable attention to technical and non-tariff barriers to trade (which include regulatory alignment). Many domestic regulations and standards (e.g. on product or food safety) can create market barriers – at least initially. But mandating adherence or creating strong mutual recognition arrangements can affect both domestic and international standards. The stock of domestic regulation should gradually be cleared of disguised protectionist measures. Other domestic regulations embed important societal values (e.g. on privacy or IPR), some of which we’ve adopted when forced to by trading partners. These values could spread out across the world, to the extent that our industries trading abroad and foreign firms seeking to sell into UK markets find it too expensive to create multiple versions of the same good meeting different standards. Regulatory regimes find an equilibrium mediated through the marketplace – the trick is to race to the top rather than the bottom.

What interested you about this area of research?

I am fascinated by governance as a property of economic interactions, and the impact of information and cognition or analysis.

When I went on the job market after my PhD I had three job offers; a fellowship at the Hebrew University Institute for Advanced Studies to do game theory research, an Assistant Professorship at the University of Illinois and a staff economist job with the Federal Trade Commission (FTC) in Washington DC. I also had an offer from RAND in Santa Monica, but I could not imagine living in LA. I planned to decide during a total eclipse in Oregon – the moment of totality passed without a decision, which I took as a sign that I take all three jobs (in series, not parallel).

I got to the FTC in time for some fascinating confluences of policy and theory relating to facilitating practices and information remedies for product safety; I got to work on automobile safety, the ‘Ethyl case’ (most favoured customer clauses facilitating collusion) and cigarette labelling. It was a really exciting time where economic theory and experimental economics could actually influence policy and through that, people’s lives.

I became fascinated with regulation as a complement to help markets to identify and facilitate efficient behaviour. This interest in policy ultimately led me back to California to work for RAND – first to work on self-enforcing agreements (like the international energy agreement and fisheries treaties), where theory could lead practice rather than giving an account after the fact. This led to my work on cartels that vote; using game theory to design mechanisms that would make the world a better place or tell you more about the world as it was.

I love regulation, because like industrial organisation it’s a clear application of game theory, which appeals to the lazy person in me who wants to have one way of thinking about all these issues rather than many different specific models.

Why did you decide to become an economist?

There’s a sense in which I am fulfilling my mother’s ambition – she was an economist of the John R. Commons (institutional economics) school. As far as she was concerned, however, my theoretical economics wasn’t real economics because (as she often said) “it had no people in it, just mathematical representations).

I went to Yale as an undergraduate and initially majored in molecular biophysics and biochemistry. But this changed – perhaps because my dad was a chemist and my mother was an economist, I was attracted by Yale’s combined sciences programme, which let you create your own degree if you could create a coherent topic, recruit supervisors and take enough credits to satisfy both sets of requirements. The overlap I found was systems that organise themselves. As a result, I wound up doing degrees in chemistry and economics.

In that era, education strove to nurture the desire to solve problems. And that requires a range of perspectives. And I can trace that through to game theory, especially communications games on networks, which I do almost as a side-line, but also to involvement with policy. Part of it is because I believe in the issues they address – a climate that sustains us, an economy that promotes efficiency and equity, etc. – but part of it is that I cannot really understand how human systems function unless I understand how people whose decisions move the needle think.

Why did you join the Economics Department at Warwick?

After Yale I went to Turkey and Munich for a sort of gap year. When I finally got to England, my economics adviser from Yale (Ross Starr), was at the LSE on sabbatical. He said ‘You like general equilibrium - why don’t you work with Frank Hahn at Cambridge?’

Uncle Frank suggested that I do a degree. Cambridge did not recognise Yale degrees, so I enrolled as an undergraduate for the Tripos. Overseas student fees were quite high, so I spent a year working at the Bank of England, thanks to Marcus Miller. The following year, when studying at Cambridge, I became aware of Warwick; Marcus and my BoE colleague Mark Salmon were affiliated with Warwick, and I also used to drive across to attend Zeeman’s lectures on differential topology.

I found the place was delightful - intellectually delightful, because you can have conversations that I would pay to be part of, and they don’t mind if your interest doesn’t go all the way to applications

I formed an attachment to Warwick at that point as a place for conversations that I would pay to be part of, on all sorts of topics. An additional advantage was possibly the nicest proper campus in the UK. Later, when I had a sabbatical from UCLA, I immediately thought of Warwick as an intellectually vibrant place, where I had friends and could ignore departmental stovepipes. So I asked to spend my sabbatical year here, and they said yes.

I found the place delightful not least because you could develop ideas theoretically, or in applications without having to pigeonhole things too soon. The students are also quite lively and there are some absolutely first-class minds. I thought this was a good place to be; as I began to get drawn more and more into the world of policy, I realised this was a good base – if I needed to find out about law, politics, macroeconomics, complexity science, etc. there are people here I can talk to and – as interest and opportunity allow – work with. I wish to continue to engage with students, I can hire them to work on my projects. So it seemed like a perfectly lovely base academically and intellectually, and in an open and unconstructed environment.

And finally there’s the physical environment – back when it was open, I loved the fact I could reach the RSC in 15 minutes; I live both in the country and just outside of town, and cycle to work along the bike path. When I go to London, it is a short cycle ride to Kenilworth train station. It’s a perfect place to spend time. And when I cross the moat that leads to Kenilworth Castle and head up the lane home, that feeling of leaving one part of the world behind and joining quite another is absolutely wonderful (even in lockdown). I can’t imagine a nicer place to be – and I’ve been in a lot of places.

You can learn more about Dr. Jonathan Cave, including a list of his recent publications here.

related:https://warwick.ac.uk/fac/soc/economics/news/2020/3/dr_michela_redoano_on_how_facebook_micro_targeting_affects_electoral_elections_and_what_brought_her_to_warwick

What research projects are you currently involved with?

Broadly speaking I’m doing research on behavioural and experimental economics, and public sector economics.

I recently focused my research on behavioural and environmental economics. I looked at the impact of different monetary incentives (i.e. a nudge and a shove) on individuals’ recycling behaviour and how this links with people’s ‘green identity’, measured in my research via an ‘environmental morale’ index. Results showed that the nudge was much more effective than the shove to increase individuals’ willingness to recycle, especially when focusing on people with high environmental morale. This suggests that the same incentive may not be effective for all individuals - i.e. one size does not fit all! I also looked at individuals’ time preferences over different goods (i.e. monetary, environmental and health gains and losses) and how this can be affected by intrinsic motivation to conserve the environment. Results suggest that environmental morale is likely to increase ‘impatience for action’ to conserve the environment. This dimension of time preference is relevant when it comes to explaining differences between discount rates in different domains, which questions whether we should continue to rely on one discount rate for cost-benefit analysis.

I am currently involved in a research project on closing the gender competition gap. Modern societies are characterised by large differences between men and women with regards to income, status in society, and success in the labour force, which research has largely attributed to differences in competition. Specifically, women are generally less likely to be engaged in competitiveness. This asymmetry has not only raised significant questions about the fairness of the selection process but also the allocation of opportunities. With a laboratory experiment, we are trying to test whether a simple psychological trick -i.e. priming (or nudging) an individual prior to competition -will reduce this gap and mitigate the undesired effects of differences in competition preferences.

Another area of research which I am particularly interested in is taxation and tax evasion. Together with other colleagues, I am working on a project aimed at analysing the discrepancy between the way people think about tax evasion and benefits fraud and their actual behaviour. They normally say that it’s wrong, but when it comes to actual behaviour they behave in a completely different way. Using the British Social Survey data (2016), we are looking at how moral beliefs are likely to influence the decision to evade taxes and commit benefits fraud. Most of the literature in this area of research has been focused e.g. on the role of social norms to predict individuals’ behaviour towards tax evasion and benefits fraud. By comparison, little attention has been paid to the relevance of morality and to the way in which moral beliefs are likely to influence the decision to engage in illegal actions such as tax evasion and benefit fraud. The project questions the relevance of moral beliefs and the different ways in which moral beliefs are likely to inform perceptions of the intrinsic value of honesty.

I guess, the reason why I decided to become an economist is because I was interested in getting a better understanding of the complex society in which we live, and economics helped me to make genuine progress on this!

What impact do you hope your research will have on society?

I like to look at things that may have an impact on public policy, especially this idea of nudging individuals to change attitudes or behaviour. For example, research suggests that a possible way to nudge individuals is by changing their default options. An application of this is the opt-out system introduced for organ donations, where citizens do not have to opt-in for organ donations (as it is currently done in England), but they are automatically registered as donors unless they choose to state otherwise. Following the example of Spain and many other European countries (e.g. Italy and Portugal) where the opt-out-system has been successfully implemented, from spring 2020 the UK will also introduce a similar system. This simple example shows how little things like changing a default option can really make a big difference in our lives.

I hope that my research will inform policy makers and provide evidence to design better policies.

One of the challenges we face as behavioural economists is the generalisation of the findings of our studies, which is commonly known as the external validity of a scientific study. A possible way to overcome this problem is to replicate the study in different contexts with different individuals. However, even by doing so, it might be the case that you end up with completely different results. Having said this, behavioural economics has widened scholars’ conceptual toolkit, encouraged research that is concerned with actual behaviour, and fostered a ‘test and learn’ culture among governments.

What interested you about this field?

I became interested in public sector economics because of the implications of Government policies on our daily life, especially in terms of efficiency and equity. I initially focused my attention on tax evasion as, along with the obvious problem of the underfunding of the government, tax evasion raises fundamental questions about the fairness of the tax system. I found it fascinating to try and understand why people (do not) pay taxes and how they trade-off their honest behaviour with the risks they incur when they decide not to be compliant with their ‘social responsibilities’.

This is what motivated me to focus on behavioural economics to analyse what motives drive individuals’ behaviour, especially when this departs from theoretical models and ‘rational’ behaviour advocated by neoclassical economics. Behavioural economics has changed the way we look at the public sector. Public sector economics has made great strides in understanding ‘market failures’ (in the case of traditional public sector economics) and ‘government failure’ (in what is known as the public choice approach) focusing on a rational representative individual -i.e. homo economicus. However, experiments after experiments in behavioural economics have shown that people are likely to depart from predicted rational behaviour in many ways, which lead to a number of anomalies that characterise a more realistic economic actor -i.e. homo realitus. This has introduced a new dimension into the problem as Governments now are facing the challenge of designing policies able to correct both ‘market failure’ and ‘individual failure’ (i.e. failure here refers to the idea that people behaviour departs from rational behaviour).

The Thaler and Sunstein’s (2008) idea of ‘nudging’ individuals to make better decisions has also opened a debate on how to use nudging as an effective policy tool. There is a lot of work still to be done here and this is what makes this area of research particularly attractive to me.

Why did you decide to become an economist?

When I left high school, I knew I wanted to continue to study, but I did not know what degree to choose. I finally chose a broad social science degree where we had the chance to study different subjects, including economics, which I did not study in high school. What I really enjoyed in high school was mathematics, which is related to economics. After the first two years of the degree, we could specialise in one of our favourite disciplines, and I chose economics as I loved studying microeconomics – and I still love it!

Economics offers practical tools to help people with real problems they face in the world every day. It offers an opportunity to understand simple concepts such as unemployment or public debt in the news. It helps us to make decisions in our daily life such as engaging in a particular financial activity or not. Economics is also about understanding political debates which affects how people vote and ultimately public policies. I guess, the reason why I decided to become an economist is because I was interested in getting a better understanding of the complex society in which we live, and economics helped me to make genuine progress on this!

Why did you join the Economics Department at Warwick?

The Department’s strong reputation for the quality of research makes it a very stimulating place for researchers. Economics at Warwick is very strong in applied microeconomics, public policy analysis and there is also an increasing number of colleagues working on behavioural and experimental economics. Having a strong research group in all these areas was a big factor.

Teaching is also closely related to our research. This is a big plus not only for our undergraduate and postgraduate students, but also for us as academics as research-led teaching brings into classes our enthusiasm and expertise in the field and allows us to talk about the recent developments of our research.

Recent Publications

• Lory Barile (with J. Cullis and P. Jones), Time Preference for Investment in the Environment: The Impact of Intrinsic Motivation. Economic Issues, Vol. 23(2), 2018.
• Lory Barile (with J. Cullis and P. Jones), Individual Failure and a Behavioural Public Sector Economics. The Cambridge Handbook of Psychology and Economic Behaviour (2nd ed.). Cambridge: Cambridge University Press
• Lory Barile (with J. Cullis and P. Jones), Will One Size Fit All? Incentives Designed to Nurture Pro-social Behaviour. Journal of Behavioral and Experimental Economics, 57, 9-16, 2015.

related:https://warwick.ac.uk/fac/soc/economics/news/2019/10/professor_eric_renaults_tells_us_how_his_work_brought_economic_theory_to_bear_on_the_newly_developing_financial_markets_in_paris/

What research projects are you currently involved with?

My research has two sides - one side is econometric methodology; the other side is more on financial markets and asset pricing. I have a special interest in econometric inference on asset prices.

When you want to be an active researcher you are always involved in several projects! I co-author a lot with colleagues or PhD students – so I have ongoing projects all around the world.

How did you choose this area of interest?

I started in the French system with a background in maths. In France, when you are good at maths you can go to the Ecole Polytechnique or other schools of engineers - but engineering was not really my cup of tea. I like maths a lot but I am not very interested in technical things. I was more interested in statistical inference and I also had some interest in the organisation of society, and econometrics brings together these two things.

I came to finance later - I was making my choice of career as a student in the mid-70s. Ten years later there was a huge development of the financial markets in Paris – and I was asked by the school I was working with to help with that. With my background in maths and economics it was natural.

I wasn’t especially interested in finance in the beginning - I was more interested in the techniques that could be used in the markets. Finance in the 1980s was changing – innovation was not coming from the banks but from the markets, new financial products were being introduced, and we could use economic and mathematical techniques to work out how to price them properly. What was exciting was that it was a field where economic theory had a direct connection with the real world. It was great to see that people in the real world were interested in theoretical work like mine.

At this time I was based in the Paris School of Statistics and Economics. There was a huge demand to train students to go and work in the financial markets and I created a new diploma for that. Really I was in the right place at the right time, because I had this background in statistical inference and price theory, and the banks wanted to talk to me. Since then a significant part of my research has remained in the field of financial economics – not always, but I have kept this interest.

What was exciting was that it was a field where economic theory had a direct connection with the real world. It was great to see that people in the real world were interested in theoretical work like mine.

What impact does your work have on society?

Sometimes the connection is not direct and there is nothing wrong with that – you do something theoretical, it will be used by someone else, and after ten steps you go to practice! You may sometimes do something very abstract, and there is a long way to go before it has an impact. With my work in the 1980s there was a direct connection between the theory and the markets – but these were fairly exceptional circumstances.

Why did you join the Economics Department at Warwick?

Warwick is a young university and the Department of Economics has been very active since the beginning. I had not particularly planned to leave the US but I heard that the Department was looking for a senior econometrician – I visited and I liked the group and the fact that I will have the opportunity to supervise a strong field of PhD students.

Since joining Warwick I have been involved in the life of the Department and the collective decisions we are taking, particularly on the job market candidates. In France there is a mandatory retirement age – I have not reached it yet, but the advantage of Warwick is that I will not have to retire when I reach 65. I am not there yet but I see it on the horizon!

Further Reading:

• Eric Renault and David T Frazier Indirect inference : which moments to match?, Econometrics, 2019
• Eric Renault and Bertille Antoine) Testing identification strength, Journal of Econometrics, 2019 (In Press).

The International Journal of Economic Theory issued a Festschrift in honour of Warwick Professor Roger E.A. Farmer this year. The Festschrift reviews and pays tribute to Roger’s ideas, his career and his intellectual legacy up to the present time.

What research projects are you currently involved with?

I have three or four projects in play at the moment. Some of these projects are theoretical in nature. Some of them are empirical. All of them are related to a theme that I call the indeterminacy agenda in macroeconomics.

Economists have long argued that business cycles are driven by shocks to the productivity of labour and capital. The models they developed have no room for the independent views of market participants to influence outcomes. In contrast, the indeterminacy agenda uses multiple-equilibrium models to integrate economics with psychology and, according to this agenda, the self-fulfilling beliefs of financial market participants are additional fundamental factors that drive periods of prosperity and depression.

Some of my theoretical work in this vein studies inefficiencies that are apparent in asset markets. Some of my empirical work in this vein involves an explanation for the disappearance of the Phillips Curve, a relationship that is supposed to characterise the connection between inflation and unemployment.

Let me begin with my work on asset markets, (Farmer 2018). Financial economists ask if the asset markets are efficient. The answer is yes – and the answer is no. The reason it’s yes and no is because economists define efficiency in different ways.

The Nobel Prize in 2013 was won by three economists working on the theory of financial markets. Two of these economists, Gene Fama and Robert Shiller put forward conflicting theories of market efficiency. Gene Fama was awarded the Nobel Prize for saying that financial markets are efficient, and Robert Shiller was awarded the Nobel Prize for saying that financial markets are not efficient. Fama defined efficiency to mean that you can’t make money in the financial markets – he called that informational efficiency. Shiller meant that it’s not possible for there to be an intervention by government that would make everybody better off. That second concept is called Pareto efficiency after the Italian social scientist Vilfredo Pareto.

In my view, the financial markets are probably informationally efficient: they are not Pareto-efficient. And that means that there are government interventions that can improve the welfare of all of us. My research explains how that can be.

My explanation is that when you trade in the financial markets, you’re not just trading with other people who are alive today. Almost all of the people who will buy or sell the assets that you’re buying or selling now are not yet born. In my book Prosperity for All I call that idea the ‘absence of pre-natal financial contracts.’ The fact that we cannot trade with those who are not yet born opens the door for Pareto inefficiencies. I’ve just written a piece that’s related to this idea for Project Syndicate where I suggest that national treasuries could exploit Pareto inefficiencies to raise revenue. Importantly, these revenues could pay for social care programmes, such as the NHS and pensions, without raising taxes.

My empirical work related to indeterminacy is on the relationship between unemployment and inflation. Here, I have shown that the indeterminacy agenda provides an explanation for a puzzle that has been perplexing central bankers in developed economies for more than a decade. According to New-Keynesian economics (this is the theory that guides policy at the Bank of England and at other central banks around the world), the fact that unemployment is currently at all-time lows should be causing a resurgence of inflation. But inflation has stubbornly refused to appear. In a 2011 paper (Farmer 2011), I developed the Farmer Monetary Model, a theory of inflation based on the indeterminacy agenda. In a series of papers with co-authors and graduate students (Farmer and Plotnikov 2018, Farmer and Nicolò 2018, 2019) we show that the Farmer Monetary Model provides a better fit to the data and a better understanding of the relationship between inflation and GDP growth than the conventional New-Keynesian model currently in use at the Bank of England.

What interested you about this area of research?

For forty years, macroeconomics has been dominated by a battle between classical ideas emanating from the universities of Minnesota and Chicago, and New Keynesian ideas, emanating from MIT. In the past decade or so, MIT has been dominant, and MIT trained economists have promoted an agenda that evolved out of an interpretation of Keynes developed by the MIT economist Paul Samuelson. According to this interpretation, the economy is Keynesian in the short run, when prices are sticky, and classical in the long-run, when all prices have had time to adjust. The MIT machine steamrollered over all opposition and became the dominant interpretation of Keynesian economics.

A parallel, but very different, macroeconomic agenda developed in the 1980s at the University of Pennsylvania. This is where I began my career. According to this alternative agenda, the economy is typically characterised by multiple equilibria and, as a consequence, economic fundamentals alone cannot explain the macroeconomy. We must also introduce psychology. This is what I did in my book The Macroeconomics of Self-Fulfilling Prophecies, which is still used today by graduate students around the world. I have been working on the idea that psychology matters for economics ever since, and I have shown that the indeterminacy agenda can explain most of the anomalies that Keynes sought to understand in a much more parsimonious way than the MIT New-Keynesian approach pioneered by Samuelson.

What I learned from my days at Penn, was that models of multiple equilibria, when combined with relatively minor adaptations of standard microeconomic theory, have a great deal of explanatory power. I have used the tools I learned at Penn to understand why prices appear sticky and why monetary policy is so powerful in influencing unemployment and real economic activity. I have also pushed the Penn school beyond its original bounds by showing how the indeterminacy agenda can explain involuntary unemployment and the stagnation that characterises great depressions.

What interested you about this area of research?

The economy is a complex evolving set of interlocking institutions and anyone who attempts to understand those institutions should probably begin from a place of humility. I nevertheless believe that economics as a tool has had some notable successes in helping to improve people’s lives.

Consider the theory and practice of central banking as it evolved in the United States. The Federal Reserve System was created in 1913, and at the time, the idea that a central bank should intervene in the financial markets by setting a price was considered to be radical. The Fed has not always been perfect in the way that it has managed the economy, and it has made a number of mistakes. But the history of the Fed is one of learning how to implement policies that are an improvement, in my view, over the unmanaged monetary system that preceded its creation.

Since the Great Depression, beginning with the intervention in macroeconomics that followed Keynes’ General Theory, we’ve been a lot more successful at managing economic fluctuations and at keeping inflation under control, than we were in the 18th and 19th centuries. There have been fewer recessions and the ones that have occurred, with the exception of the Great Depression, have been smaller in magnitude. That is a consequence – in my view – of good policy.

It doesn’t mean we don’t make mistakes – we do – and sometimes they are big mistakes. But there’s a steady improvement as we learn more about the way the economy works. Consider, for example, the experience of inflation targeting, which was first formally adopted by the Reserve Bank of New Zealand in 1990. Informally, it began shortly after Paul Volcker’s accession as Chairman of the Fed in 1979. The period, from 1979 to 2007, was one of relative stability as countries throughout the developed world brought inflation down from double digits in the 1970s to the low single digits where it has been for a couple of decades. In 2007 we hit an unexpected road bump, as the policy that had been used to control recessions was ineffective as the interest rate hit zero and could be lowered no further. We have learnt from that bump that central banks need a second way of intervening to prevent recessions over and above the policy of moving around a short-term interest rate. My theoretical and empirical work explains what that second policy should be and why we need it.

In my book Prosperity for All I argued that financial instability is a major cause of the mass human misery that we experience during big recessions. Many voices are arguing for governments to spend more to get out of a recession. I disagree. Although fiscal expansion might work in the short-run, it is slow to act. In my recent books, academic papers and op eds, I argue that there is an alternative more effective policy. The Bank of England should actively intervene to stabilize the financial markets.

Under a regime of inflation targeting, central banks are charged with moving around interest rates. Some central banks, the ECB is an example, have a single target: to stabilise inflation. Other central banks, the Bank of England and the Fed are examples, are charged with hitting a secondary target: to maintain real economic stability and high employment. We have known for a long time that a policy maker who wishes to hit two targets needs two instruments. One is not enough. The momentum and time is right to adopt a new tool.

It has often been argued that the second instrument should be fiscal policy; that is, expanding government expenditure or changing tax rates when a recession hits. The problem with that advice is that fiscal policy is a slow and clumsy instrument. In my view, it would be more effective to use interest rate policy to target inflation and to use active management of the financial markets to control unemployment.

A lot of the arguments I’ve been making for the past thirty-five years have begun to find their way into the public consciousness and into the current economic narrative of journalists, politicians and economists alike. Will we actually move to the full extent of managing the equity markets in the sense of targeting a return to equity? My guess is that it will take another major recession before that idea becomes accepted. And make no mistake, there will be another major recession: the only uncertainty is when it will occur.

Why did you decide to become an economist?

I stumbled into economics through having good teachers - I started out studying econometrics at the University of Manchester. I moved to Canada following Michael Parkin and David Laidler, two of my teachers at Manchester who moved to the University of Western Ontario (UWO) in the late 1970s. They encouraged me to follow them and they offered me a fellowship to study with them in Canada. When I arrived, I found that UWO had a stronger group in macroeconomics than in econometrics and I switched fields. I have never looked back.

Why did you join the Economics department at Warwick?

Like many people before me, I left the UK for the excitement of a foreign country. But I always intended to return. My plans changed once I had a son who grew up in California and I discovered that, once you put down roots, it’s harder to leave.

Now my son is grown up and is an economist in his own right and I have fulfilled my dream of returning to the UK. I am actively contributing to the public debate with the goal of influencing economic policy for the better.

Warwick has always had a strong connection with the Bank of England and with policy-making in Westminster. It’s an extremely strong and vibrant department. And it’s a place where there is scope for interacting with very smart graduate students, sharing my perspective on macroeconomics, and influencing how students think about the world.

Further Reading:

• Roger Farmer and Platonov, Konstantin, Animal spirits in a monetary model. European Economic Review, 2019, 115. pp. 60-77.
• Roger Farmer and Giovanni Nicolò, Some International Evidence for Keynesian Economics Without the Phillips Curve, The Manchester School (In Press).

related:https://warwick.ac.uk/fac/soc/economics/news/staff-profiles

What research projects are you currently involved with?

In general I work on public policy in developing countries, particularly public finance – taxation – in the developing world.

My research aims to improve our understanding of how taxes work in developing countries - how they affect firms and consumer behaviours; to understand what’s the most efficient way to tax – taxing in a way that raises revenues but doesn’t harm growth; and to understand who ends up paying taxes in developing countries.

To do this research I work closely with government officials and with politicians – for access to their data, and also for a good understanding of institutional knowledge. It’s not enough to read up on the internet or read tax laws - you need to talk to people in government offices, to the civil servants and the bureaucrats, asking - exactly what does this mean? What can a firm do to pay their taxes correctly? Or to evade their taxes? What do you think they are doing? I travel a lot to maintain the relationship. It can’t be done by email, you have to show up.

There’s a general academic aim, which is that we want to understand things better. And for me there is also a strong aim in trying to make sure we always have a link to policy. So we try to answer the question with as much data as possible, and then we ask what does that actually mean for tax policy.

The interaction with think tanks was also a big draw. Warwick is in favour of me building strong relationships with relevant policy bodies including the IFS.

What difference will this work make for society?

So for example, I’m working with the IFS think-tank on value-added taxes in India. We’re basically trying to understand whether value-added taxes affect a firm’s decisions to trade with other firms, under a tax system which gives you an incentive to only trade with firms that have the same tax status as you. It’s interesting because it lets us see how firms actually react to tax incentives - do we see that when taxes change they trade more or less than other firms?

Another strand of my research is trying to understand who actually pays taxes in developing countries, particularly consumption taxes – that’s value-added taxes, any kind of tax paid by firms on their sales. In rich countries we’ve tended to find that these taxes are regressive, that is, the poor pay more in taxes as a share of their income than the rich. But this might not be true in developing countries, because in these countries there are large informal sectors, shops and businesses which don’t pay taxes.

We’ve got data on 20 countries and we’re hoping to get to 30, but it’s clear in all the countries we’ve studied – in Latin America, sub-Saharan Africa, and a little bit in Asia – it’s always the case that the rich spend more in the formal sector. So with a flat tax on all consumption – say, 10 per cent on all consumption and all sales – you are actually going to get a very progressive tax system.

Through this research we’re building an optimal tax policy model based on equity considerations and efficiency. These models do already exist but so far they haven’t taken into account the informal sector. Once you introduce an informal sector it’s less optimal to have very different tax rates on different types of products. For example, if you set a lower tax rate on food, all you’re going to do is tax rich people’s consumption of food less. And that’s an important result because countries everywhere tend to set lower tax rates on food and policy advice to developing countries quite often recommends zero-rating food. Which reduces revenues. And we’re able to say that this is losing revenues to the government, the trade-off doesn’t look that great because you’re not getting redistribution from zero-rating food.

Why did you decide to become an economist?

Economics helps to make sense of the world. You hear about things like unemployment and inflation on the news every day and economics tells you why this matters, or why they may not matter. Economics is also how you understand political arguments – and I don’t think you can make an informed choice between political parties unless you know the basics of economics.

What interested you about this area of research?

I became interested in economics because of the policy aspects, particularly taxes because they are at the heart of what makes a government. You can’t have any kind of collective action if you don’t have any revenues to fund it. So taxes come before anything else, really.

I decided to focus on developing countries because there is a lot of work still to be done. There is a lot of work already on tax policy in rich countries – there has been a bias in terms of publishing and writing about the US and the UK, but now the profession is changing and there’s less focus on these countries.

Even so until recently there was hardly anything on developing countries. The work that was done was applying the models and the things we know about rich countries straight to, say, India, without really thinking about the fact that the context is different.

Why did you join the Economics Department at Warwick?

The quality of the department was a big factor. Economics at Warwick is very strong in applied microeconomics, public policy analysis in general, and working with data to establish causality. And I am at the intersection of public economics, development economics and I’m starting to work on trade economics so I needed a group that was good in all of these things, and Warwick is.

The interaction with think tanks was also a big draw. Warwick is in favour of me building strong relationships with relevant policy bodies including the IFS.

What has been your most memorable experience during your time in the department?

We organise a lot of seminars and workshops – arguably we do too much, but the stuff I have been involved in has been great.

Last year we organised an applied micro workshop in Venice, which attracted some really brilliant people – I had only really just started in the profession and there I was presenting my work in front of super-famous senior scholars at this workshop, because they wanted to come to Venice, and everyone is there in the same room – that was pretty cool.

Recent Publications

• Lucie Gadenne and Julia Cage, Tax Revenues and the Fiscal Cost of Trade Liberalization, 1792-2006.
• Lucie Gadenne, Tax Me, But Spend Wisely? Sources of Public Finance and Government Accountability. American Economic Journal: Applied Economics, 2017, Vol 9 (1).