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Yesterday, the Royal Swedish Academy of Sciences announced that the 2016 Nobel Memorial Prize in Economic Sciences was given to Oliver Hart and Bengt Holmström, respectively of Harvard and MIT, for their work on contract theory.

As far as I am concerned, it was about time those two got the Nobel. But then again, I have been a big fan of Holmström and Hart for a long time–I went into graduate school wanting to work on applications of contract theory, and I did just that by writing a dissertation titled, rather un-enticingly, Three Essays on Agrarian Contracts.

In 2004, I spent eight months in Madagascar to collect primary survey data for my dissertation. Because I arrived during cyclone season, my field site was not accessible for some time, and so I decided to go through the entire syllabus for a course in applied contract theory that was then taught at the European University Institute by Pascal Courty. In the process, I read a number of things by Hart and Holmström, all of which were very enlightening.

An excerpt from a post over at the interestingly named Kids Prefer Cheese:

Just don’t do [IV] …

Here are the problems.

First of all, no matter what you may have read or been taught, identification is always and everywhere an ASSUMPTION. You cannot prove your IV is valid. …

I pretty much refuse to let my grad students go on the market with an IV in the job market paper. No way, no how. Even the 80 year old deadwoods in the back of the seminar room at your job talk know how to argue about the validity of your instruments. It’s one of the easiest ways to lose control of your seminar.

As we say in Minnesota: That’s different. Two things:

Commenter GP writes:

Great post. Further thoughts:
1. Signalling and the sheepskin effect. It would appear that the importance of college in the US is, to a large extent, the signal given by being admitted to a selective university, and the signal given by successfully completing four years of coursework. This might explain why Goldman Sachs would hire a Harvard anthropology major.
2. I believe I read (proof needed) that the proportion of college enrollments in “soft” fields has been consistently increasing over time. Signalling aside, your major matters for employability. Not to mention basic writing and communication skills, which I found severely lacking in students at a flagship public university in the US.
3. There is indeed evidence that when you enter the job market (boom or recession) can affect your lifetime income. Getting a Master’s degree to delay job market entry until after a recession might be a good move, unless everyone reasons the same way.
4. The discussion is often framed as “yes, college at any cost” vs. “no college is ever worthwhile.” This is absurd. Cost matters, and a simple tool like Net Present Value can help get a ballpark estimate of the value of a particular college degree.
5. Gates, Zuckerberg, Jobs… the media never discuss survivorship bias…

I agree with all points. I have seen many people with non-STEM degrees get jobs in investment banking or in management consulting–not necessarily because they were smarter than others, but because of where they went to college.