Professor Rakesh Vohra is a leading global expert in mechanism design; an innovative area of game theory that brings together economics, engineering, and computer science. He has formerly taught at Northwestern University, and later joined the University of Pennsylvania as part of the Penn Integrates Knowledge program. His work has been critical to the development of the game, auction, and pricing theory. He has also authored several books like Prices & Quantities: Fundamentals of Microeconomics, Principles of Pricing: An Analytical Approach, and more.
Q1. This year’s Nobel Memorial Prize in Economic Sciences has been awarded to Paul Milgrom and Robert Wilson, economists who pioneered auction theory and invented new formats that have changed the way the public resources are allocated. Being undergraduate students, with a large reader base of undergraduates, can you break it down for easier understanding?
Prof. Rakesh Vohra: The prize that went to Paul Milgrom and Bob Wilson is not the first prize that the Nobel committee has awarded for work that is directly related to the study of auctions. So, probably, the first prize went to William Vickery. Vickery, unfortunately, died the day after receiving the news that he had been so honored and Vickery is remembered today for what's known as the Vickery auction, which was part of the reason that he was awarded the prize and then subsequently Leonid Hurwicz, Eric Maskin and Roger Myerson won the prize for mechanism design, but the work by the three of them would be applied to auction theory. So what this tells you is that the study of auctions is central to economics and it's central for at least three reasons.
So reason number one, is there are a variety of important assets, very valuable assets that are sold through auction, radio licenses, spectrum licenses for TV, bus routes, distressed assets when governments are privatizing, etc. are all sold through auction. Second, we are interested in auctions because they offer a useful stylized environment to think about competition. And the third reason we're interested in auctions is because, in a sense, they are the canonical example of the role of information, or more precisely the role of asymmetric information, what happens in economies when some agents know something that the other agents don't.
Q2. Your recent book, ‘Prices and Quantities: Fundamentals of Microeconomics,’ covers several aspects of intermediate microeconomics. Would you like to talk a little about your book and offer an insight into the same?
Prof. Rakesh Vohra: I am excited about the book because it's a rethinking of the way that intermediate microeconomics is taught. I have used it now, at least the material and the format for five years here at the University of Pennsylvania and from the student feedback, I would say the reaction is positive. Although I think the students would all agree that they suffer while they take the course, but, in a good way! I think what I'm trying to do in the book is sort of trying to explain why mathematics is so important to economics. And the intermediate course is problematic for many students because it is the first time that they see any serious mathematics being used in the analysis of economic problems. And there is a natural reaction, which is, why do we need mathematics?
Maybe all of this is just a giant ploy to keep people out. So, the goal is of course really to explain why you need the mathematics or put it differently to explain why blah-blah-blah alone doesn't generate any insights. And so, this is something that's emphasized in the book and in the class, which is, we typically want to build models when we're confronting a situation where our intuition is confused. So, our intuition leads us in two different directions, and it is not obvious which direction is the right one!
I am happy to give you a concrete example of why blah blah alone doesn't help. Here is one which is a classic.
Imagine you have a monopolist. The monopolist will charge prices that would be high relative to what you might think is efficient. So a natural thing that you might enquire about is would it be beneficial to regulate the price of the monopolist, in particular, force the monopolist to level away from the price.
Then we think about this question in economics, we realize: wait for a second, consumers will benefit. But the monopolist will suffer and this is something important to keep in mind. In economics, every one counts and they count equally. So you can't say that simply because there are monopolists, we are going to ignore their welfare. So now you have an obvious question, does the benefit to consumers from the lower price exceed the harm that the monopolist suffers. That’s not a question you can answer with words. That requires a model. And it requires analyzing the model to see exactly what the magnitudes of the various benefits across will be.
Q3. There seems to be a huge gap in the education system in India and the US. Do you think the National Education Policy will help cover this gap, providing more opportunities to Indian students and thereby improving the quality of education?
Prof. Rakesh Vohra: We should be precise about what we mean. I’m not particularly interested in the top 1-2%, who can afford private education. My real concern is those who must rely on public institutions to obtain their education and its obvious that there is a massive failure in the public provision of education and the reason why I would argue, it’s obvious, is there is a number of private providers who have stepped into the market so you can think of tutoring services, coaching services, the number of private universities set up by businessmen who got land deals, so on and so forth. This suggests that you know there is a failure in public provision. Will a National Education Policy help? The answer is a lot will depend upon how it’s executed. Execution is everything and it is tied up with incentives. You are not going to get to see success in the public provision of education until you have the incentives for educators set up properly. So the short answer to your question is that going to do it all cheap, decision-makers are not going to work. You are going to have to allocate money and resources.
Q4. Recently there has been a steep fall in India’s GDP. What do you think the government can do to curb this?
Prof. Rakesh Vohra: Well, let me give you the standard economist's answer. It would be that the reason for the fall in the GDP is because of the tentacles of the state, and simply the state has to get out of the way. Yeah, one can argue about the specifics and the particular way in which the state should get out of the way. But I think the answer is very clear. The state plays too large a role. And, and it shouldn't.
Q5. How effective will a combination of game theory and behavioral economics be while formulating policies?
Prof. Rakesh Vohra: Well, you know, you're asking this question of someone who would be considered critical of behavioral game theory. So it's a hobby of mine to criticize behavioral game theory. So I'll do it, I'll make some extreme statements. But you should keep in mind that, you know, it's an extreme statement to be provocative, doesn't necessarily mean that what I'm saying is true or correct.
So the fundamental difficulty that we have with behavioral economics is that it doesn't give us sharp predictions about what will happen. Second, many of the behavioral anomalies that have been identified, have typically been identified in laboratory settings with students rather than with experienced decision-makers. Now, this is not to say that those anomalies are real. But the thing is, number one, one may be concerned that the decision-makers in high stake settings may not suffer from those behavioral biases. Number two, in reality, we may have multiple possible biases operating at the same time, it is then no longer clear which one of these is going to be dominant or going to drive decision making. So the result, as I said before, is unclear, what the predictions are from behavioral economics. And if you think about it, the most often touted success of behavioral economics is the nudge, and to some of the proposals and nudge, one's reaction is, did I need to know a lot of economics to suggest that? I think the answer is no. So I have yet to see the value.
I think game theory is more useful. The person who thinks seriously about game theory recognizes the importance of incentives, and that when you change the environment, you change the way people behave. So a lot of what we do in game theory is thinking hard about how people will respond to a change in the environment and that I think is of fundamental importance when thinking about policy.
Q6. Would you consider the game theory to be an integral part of an undergraduate economics course?
Prof. Rakesh Vohra: Not only would I say yes, but I think it's already happened. In other words, there are some aspects of game theory that have already seeped into intermediate and the other basic courses, we simply don't comment on them. But do I think every undergraduate in economics needs to take an undergraduate course in game theory? No.
Interviewer- Latika Murarka and Sara Bhasin
Image Source- Medium