Economists . . .

Catherine Rampell writes:

On Monday the Nobel Foundation, which bestows the world’s most prestigious academic, literary and humanitarian prizes, said it was reducing the cash awarded with Nobel Prizes by about 20 percent. . . .

Peter A. Diamond, a professor emeritus at the Massachusetts Institute of Technology who also received the Nobel in economic science in 2010, observed that over the long run, cutting the cash award could dilute the prize’s prestige.

But he added that Monday’s news overstates the financial blow to future laureates. “One of the things that comes with the prize, besides the prestige and the money,” he said, “is the opportunities to make more money.”

I wouldn’t think these guys need the money, but I suppose it’s part of their professional code that they have to say that? (Recall our earlier discussion of the economist who said he’d stop working once his marginal tax rate reached the anticipated value of 93%.)

12 thoughts on “Economists . . .

  1. Perhaps it’s more that it is not against their professional code to be willing to say that.

    To your standards various former politicians may not “need the money”, but their status affords them opportunities to make more money (beyond the prestige and salary garnered while in office) – opportunities which many of them use, but do not comment upon so boldly.

      • In the article Diamond didn’t state it as his main motivation either! We don’t know all of Diamond’s statements, just what served Rampell’s article to quote.

        The article was structured with the Mortenson quotation ahead of the Diamond quotation. The effect is to have the two quotations point out that money isn’t the main motivator, and that further the money impact is less significant than might be thought at first blush.

  2. I think you’re being too hard on Diamond. He’s merely commenting that V(Prize) = Money + Other Stuff (some of which is enhanced money opportunity). If you assume that dOtherStuff/dPrize = 0, then V(.8Prize) = .8Money + Other Stuff > .8V(Prize).

    By the way, if you’re offering one for this equation, I’ll take it.

    If your comment simply means that the enhanced earnings opportunity of “Other Stuff” shouldn’t be mentioned in polite company, well that’s (a) unrealistic and (b) in conflict with the news this week that Tom Sargent is being paid 2.5 million over the next two years to teach in South Korea.

    • Jonathan:

      Sure, but it just seemed like a funny thing for him to bring up. He’s retired with a good pension, the last thing he probably needs is moneymaking opportunities.

  3. Benabou and Tirole’s 2006 AER paper discussing the ‘overjustification effect’ seems relevant. Short summary: individuals who do not want to be perceived as extrinsically motivated may actually contribute less in the presence of large incentives. In order to decide on Diamond’s position, it seems like we need to decide whether ‘prestige’ is more related to intrinsic or extrinsic reward.. My feeling is that cutting the cash prize might actually increase prestige.

    http://www.princeton.edu/~rbenabou/papers/AER%202006.pdf

  4. @Jonathan: the problem with that argument is that it doesn’t really seem to congrue with the facts. Consider the Fields Medal, which comes with a cash prize of 15000 C$ (~ 15000 US$). The Fields Medal is often considered to be more prestigious than the Nobel – indeed, Nash is said to have felt that his Nobel did not outweigh his not having received the Fields Medal for his major works (in algebraic manifolds).

    Prestige, in my opinion, doesn’t always correlate with the monies. At my old school, the most prestigious stipend was for best Latin paper, although the stipend was only around 1000 dkr (~ 175 US$), due to the stipend originating in the 17th century.

    • I agree, but all that means is that, across prizes, corr(Money,Other Stuff) is low. Some prizes (the Fields medal) are tremendously high on Other Stuff and low on Money. Other prizes (the megamillions lottery) are high on money and probably negative on Other Stuff. But my equation above held the Prize constant (in this case the Nobel). Even within the Nobel categories (whatever you think about the Swedish Bank Prize and its pseudoNobel status) the Prizes differ tremendously in their Other Stuff components even while holding the money prize constant.

  5. “The reduction was the result of ugly returns on its invested capital … down 8 percent from the previous year”

    Since they seem to be doing worse than a Vanguard Index Fund, maybe they should give an award to John Bogle (who popularized index funds while head of Vanguard)

  6. I think it rather depends on who the target audience for the awards will be. I know that when I was in physics they could have eliminated the cash award entirely and people would have still been extremely interested in winning it.

    Right now the median recipient seems to be an academic, older, and from a generation with a lot of financial security. The money is really an afterthought. Paul Krugman was in no danger of eating catfood either before or after winning the Nobel prize. But maybe this will start to matter if later generations of academics have less employment and financial security?

  7. Yeah, I recall the earlier discussion. I also recall posting a back-of-the-envelope calculation that the economist’s marginal tax rate (using his methodology) would well exceed 100% if the tax rates in effect up until Reagan were in effect. We never saw that phenomenon occur–maybe people didn’t know how to calculate before there were personal computers. Your comment at the time for refusing to comment on this was “I’m a statstician, not an economist”, a line you got from DeForest Kelley). Just work through the figures yourself using the “methodology” the economist used.

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