Session 1
— What is Economics?
Case Study 1.1c "Nobel
Prize in Economics 2000"
Current as of: October 11, 2000
Directions: Complete the following case study and record your answers on a separate sheet of paper.
Topic: The economic motivation for immigration to the United States. A brief history of recent immigration laws is included.
Objective: Understand the reason for and issues around immigration to the United States. Recognize the changes to the immigration laws in the United States.
The Nobel Prize is the world's most infamous and sought after intellectual triumph. The Nobel Foundation was created in 1900. The foundation was set up as part of the will of Swedish industrialist and inventor Alfred Nobel. His will decreed that the majority of his fortune be used to fund five yearly prizes in the disciplines: Physics, Chemistry, Physiology or Medicine, Literature and Peace. In his own worlds, Nobel deemed that the prizes go "to those who, during the preceding year, shall have conferred the greatest benefit on mankind." The prize is awarded by the Nobel Academy, making the Nobel Prize an award from one's peers. Winners of the Nobel Prize are referred to as Nobel Prize laureates.
The Nobel Prize in Economics was added to the Nobel Foundation in 1969 with support from the Bank of Sweden. The prize's official title is: The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. The actual prize is a gold medal accompanied by a diploma and a sum or money. The financial portion of the prize is currently $1,000,000.
In 2000 two men shared the Nobel Prize in Economics: James J. Heckman and Daniel L. McFadden. The citation of the Academy read: "to James Heckman for his development of theory and methods for analyzing selective samples and to Daniel McFadden for his development of theory and methods for analyzing discreet choice."
CS Question #1: Why is the Nobel Prize so prestigious?
The contributions of both Heckman and McFadden have benefited the social sciences, especially economics, by way of their theory and method development within microeconometrics. What's microeconometrics? First, let's look at the root of the word: microeconomics. Microeconomics is branch of economics concerned with single factors and individual decisions. At the microeconomic level, individual decision making and economic interactions are examined. These decisions take place at the individual, household or business level. Microeconometrics is where microeconomics and statistical data meet. Microeconometrics is the study of microdata, or statistical economic information about individuals, households and businesses.
New technology increased the availability and size of computer databases. As a result, access to microdata has skyrocketed. Computers offer new ways to interact with microdata. This increase in data and technology has also brought about new problems.
Researchers are only able to view certain variables. This can cause the loss of randomness, decreasing the data's ability to represent the whole population. Researchers are also handicapped by the limits to what they can observe. Sometimes, this means that they have no way to understand the differences among the statistical sample. Remember the statistical sample or observed data refers to the statistical breakdown of individuals, households and businesses and the choices they make.
CS Question #2: Do you think microeconometrics and microdata are important to economic study? Explain your answer?
James J. Heckman developed a methodical correction to be used when a microdata analysis does not represent the overall population. For instance, in analyzing data to find the connection between education and employment, the data does not take into account those who have chosen not to work. This is an example self-selection. Self-selection refers to the inability of selective samples to incorporate the factors of behavior and choice. In such situations, Heckman's correction is applied. The researcher creates a model for their subject. This model is a representation of the probability of the outcomes based on economic theory. This probability then becomes a variable along with the other variables of the project. By adding in the probability, the statistical data is more representative of the actual experience.
James Heckman was born in Chicago, IL in 1944. His revelation about self-selection and how to correct for it occurred in the 1970s. He is the world's leading research analyst on the labor-market program using microeconometrics. Heckman currently holds the position of the Henry Schultz Distinguished Service Professor of Economics at the University of Chicago. His most recent research has dealt with social programs, the labor market and alternative models of the distribution of income.
CS Question #3: What part of economics does James Heckman focus on?
Daniel L. McFadden's contribution to microeconometrics was by creating a theory of discrete choice that had an economic foundation. Discrete choice refers to a choice made from among a fixed set of alternatives. McFadden's theory states that an individual chooses from a set of alternatives in order to maximize their benefit. As a part of this theory, McFadden created economic models, including a mathematical logarithm. These theoretical models can be used to predict the percentage of the population that will choose different alternatives.
Daniel McFadden was born in Raleigh, NC in 1944. He generally applies his theories to social issues. He has recently been involved in environmental economics, specifically in the methods of determining the value of natural resources. For the last decade, McFadden has held the E. Morris Cox Chair in Economics at the University of California, Berkley.
CS Question #4: In what area does McFadden apply his microeconometric knowledge?
Further Thought: