Monday, August 31, 2009

Greg Mankiw Ignores the Price Model...

...and then seems to be confused with how to ration spots in his Econ seminar. Writes Mankiw:

I am teaching a Harvard freshman seminar this semester (in addition to ec 10), and one of my first tasks is to choose the 15 students. About 200 applied. That means that getting into my seminar is about as hard as getting into Harvard--except that you first have to get into Harvard before you can even apply!

Having spent much of yesterday reading through the applications, I fully recognize how difficult and somewhat random such admissions processes are. I could fill almost the entire seminar with kids with perfect SAT scores (2400), but I won't, as there is more to life than test scores. I am looking also for passion about the subject, interesting life experiences, and a balance among the group of students to promote good discussion. But judging that from a few brief essays is very, very hard. To those students I do not pick: I am sorry, and it is my loss as well for not having the opportunity to get to know you better.
So what exactly would be the problem with Mankiw instituting an auction and opening the course up to the highest bidders? And how can you really believe this guy when he talks about prices as signals, when he refuses to use the system himself? Then again, may be he won't talk about prices as rationing signals.

5 comments:

  1. But Mankiw presumably doesn't care what people are willing to pay for the seats. If his goal is really, as he indicates, to get the best crop of students, then the fact of rationing isn't his problem. His problem is the selection.

    I think you're describing it backwards by asking about an auction where the students pay Mankiw (or Harvard) for the seats. In effect, Mankiw and Harvard are paying the students, not the other way around. Like an manager, his task is to find the right people to fill his positions, not to find the people who can bribe him for them.

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  2. In effect, Mankiw and Harvard are paying the students..

    First, every transaction everywhere has both sides "paying". Mankiw pays with his lectures.

    The supply of freshman Harvard students wanting to hear his lecture is 200. In his post, he admits that there is no non-price way to differentiate who should be in the seminar.

    Thus, price sounds like a good criteria for me.

    You are building a strawman when you talk about managers. If they don't all have the same skills you choose the one that has the best slills. I repeat again, Mankiw in his post says he is not able to differentiate among those who want to be in his class.

    Mnakiw writes:
    I fully recognize how difficult and somewhat random such admissions processes are...
    ...judging...from a few brief essays is very, very hard...


    You don't think those who are willing to pay $$$, would have "passion about the subject, interesting life experiences, and a balance among the group of students to promote good discussion," that Mankiw is looking for?

    Or would you rather have someone in the class that is overall very bright and has picked Mankiw's class, but wouldn't pay a dime to be in it?

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  3. Yes, of course both sides are paying, but you're suggesting that the situation would be better if one side was paying with cash. My comparison of Mankiw to a hiring manager was not to suggest that he literally pay the students cash, but that his task, like the hiring manager, wouldn't really be helped by introducing money to his decision-making process.

    You shouldn't really believe that Mankiw thinks there's no way to discriminate between these 200 applicants. His problem isn't that he can't decide, but that he's worried he isn't making the best decision because his information is limited to a single essay.

    If he used an auction instead of an essay, to pick 15 students from the 200 applicants, I don't think Mankiw would be happier with the results. And that's the point, right? We're trying to solve Mankiw's problem.

    Why use money as a the price, when money is almost certainly less correlated to the qualities that Mankiw is interested in than the essay itself. So it's a worse outcome for him.

    He is facing the same problem that any fortunate hiring manager does. He has too many good applicants. And if an auction wouldn't help a hiring manager, I don't see how it would help Mankiow. What he really needs is a better hiring process.

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  4. Pricing works.

    If there are too many good managers at a given salary, you are overpaying and should lower the salary.

    You shouldn't really believe that Mankiw thinks there's no way to discriminate between these 200 applicants.

    You are now saying that Mnakiw is less than trutful? I am not sure at all how you can make that decision.

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  5. "You are now saying that Mnakiw is less than trutful? I am not sure at all how you can make that decision."

    No, I'm going by Mankiw's own actions. He did choose 15 based on their essays. He didn't randomly select them. He's just lamenting that his chosen selection process is limited.

    Do you really think the results of an auction would make Mankiw happier?

    I agree with you, of course, that pricing works. But prices don't have to be denominated in dollars, and in this case cash is a poorer determinant (for Mankiw's purposes) than even his current price.

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