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Paul Milgrom, Professor at Stanford: “Engineering will be very important for the economy, therefore CEA’s role is especially promising in terms of productivity”

Paul Milgrom is one of the best known economists on game theory and the experts say that the next Nobel Prize on economy will be awarded to him. As the creator of the auction mechanism, he changed public auctions forever by designing a resource allocation mechanism capable of maximizing the revenues and giving good results.

Milgrom visited Chile on the second week of August for the celebration of the Center of Applied Economics (CEA) 25th anniversary, instance in which he gave the lecture "Economics and Computer Science of a Radio Spectrum Reallocation” and reported the challenges of the last radio spectrum action process in the United States.

How does auction theory change as economy changes too? What areas are important to study on this matter? He spoke about these and other topics in tis interview.

-In what way has computer science transformed the auction theory?

That’s a good question. The type of auctions I studied at the beginning were relatively simple because back then computations were simple. However, many of the auctions that are made nowadays are difficult, and the action theory must update and answer to these new needs. In some cases, one of the most difficult parts of the current auctions or tenders is to make it on products that we could compute. That is to say, that what we buy and sell has to be something that we can compute with.

-Chile is carrying out different bidding processes: fishing quotas, highways, and public purchases, among others. According to your experience, ¿how can we improve these processes?

I’m not right on top of with what Chile is doing, but I am almost sure they can be improved, especially because, in the areas mentioned, the way the process is carried out is in general poor. From this point of view, the auction theory can help to define important details of the process, such as how to avoid collusions. Also, the theory can help to create competition to get a good price of a good in the market and assign projects efficiently.

-You have a lot of experience in business. How do you combine that area with education?

I teach my students based on work and teaching experience. I urge them to study subjects that are important for real economy. I also teach them about some projects I’ve been on. Students like and are motivated by those subjects that they consider will be useful for society.

-You are a renowned professor who knows how to apply the economy theory to practice areas. ¿Theory or practice?

I love the way they interact. What I really get exited about is to study practical problems that have raised deep theoretical problems, the experience of working on a new challenge that no one knows how to solve. Theory is about abstracting a problem, describing it in an abstract way, and solving it to, finally, taking it back to solve it in practice. When I can do that, it is perfect to me. 

-In what areas has your consulting been more needed? Public or private sector?

I’ve worked more in the public area, but both sectors are interested in improving efficiency. It is frequent that I get called from sectors in which the markets are new and people do not know about market design. That’s why I think I’ve been involved more in the public side, since in that sector there are areas where markets have not been implemented yet.

-I understand you wrote a paper with your wife. How was that experience like?

It was fun. My wife is a sociologist and sees herself as a general social scientist. We worked on a paper that combines ideas from economics and sociology. It is not my most successful paper, but it was fun.

-Your students are very successful. Do you have any advice for our engineering students?

It is true, many of my students are successful, but I’ve had a very small role in their development. I’ve had many students that are brilliant. Having said that, I can say that I’ve encouraged certain attitudes on my students that I feel have helped them, such as the collaboration among research groups. I think it is very important that students help each other and that the ones who are more advanced help the first year students. This creates some competition among students but also support.

He adds:

Also, I help them to decide about research topics. Often students choose topics that are too simple or not interesting. I push them to work on important matters and research deeply. Finally, I put a lot of emphasis on the presentation of their research. I do this because you can be an excellent researcher but of you are not convinced that your topic is important and will yield a good research, you will not make any impact.

-What are the next steps on your research?

Over the last years many important changes have occurred in the organization of the economy and the markets are much more complicated than they used to be. For example, when you sell advertising on the internet, every single impression is priced separately. When we sell radio spectrum, there are differences in the frequencies characteristics that must be taken into account to determine the price. If we think about cloud services, no one knows how to put prices. The old framework under which the economists used to operate, in which there was a limit in the number of commodities and a competitive market for each separately, does not describe what is happening in the modern world. That’s why I would like to review the foundations of price theory from the point of view of market design and see what it tells us about how the whole economy operates.

-The Applied Economy Center (CEA) turns 25 this year. What do you think of it?

The CEA is in an engineering school, which is a very good position since it allows its researchers to take advantage of the matters happening in both areas (economy and engineering). Engineering will be very important for economy, therefore CEA’s role is very promising in terms of productivity. I’m very glad they are celebrating this anniversary.

Source: Departamento de Ingeniería Industrial de la Universidad de Chile 

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