The Road to a Nobel Prize

How does an economist choose their area of research? What are the influences on how they pursue their goals? What do they see as the next steps in their chosen fields? The answers to these questions will be central to the way that young economists – and indeed academics from any discipline – will take decisions in their own careers.

Three Nobel Laureates who won their prizes for separate work on contracts, incentives and organisations took part in a panel at the 6th Lindau Meeting on Economic Sciences. They discussed the personal academic journeys that led them to make the intellectual findings for which they were recognised – and the people and research that had influenced them.


Panel Discussion: Contracts, Incentives and Organisations duirng the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Christian Flemming/Lindau Nobel Laureate Meetings

Panel Discussion: Contracts, Incentives and Organisations at the Lindau Meeting. Picture/Credit: Christian Flemming/Lindau Nobel Laureate Meetings


Oliver Hart, who won the 2016 prize for his work on contract theory, was motivated to look at incomplete contracts after a conversation with Sanford Grossman in which they asked why one firm would ever buy another firm rather than just trading with it. As trained microeconomic theorists, they decided that they could add to the informal existing literature. After grappling with issues such as the role of authority and the idea of requirements contracts, they realised they were thinking about it in the wrong way.

‘The penny dropped that we were thinking in complete contract terms when we realised it would be better to think about it in incomplete contracting terms,’ Hart said. ‘In complicated relationships that take place over many years, it is very hard for the parties to foresee the future and write the idealised state contingent contract.’ Hart and Grossman went on to write the highly influential paper Incomplete Contracts and the Theory of the Firm.

Bengt Holmstöm, who shared the prize with Hart in 2016, took a less direct path towards economics, gaining an undergraduate degree in mathematics at the University of Helsinki and a masters in operations research and doctorate at Stanford. While working later for a large conglomerate in Finland, he was asked to implement a corporate planning model.

‘It didn’t take before I realised that this did not look like the right thing to do’, he said. ‘That ignited my interest in incentives and provided an endless source as a sounding board – I don’t get enthusiastic about anything that does not match with the reality. If the apple falls up rather than down, then I’m not interested in that model.’

Jean Tirole, who won the prize in 2014 for his work on market power and regulation, said that he believed it was impossible to develop thoughts in a vacuum. Although he admitted he found it hard to codify his own research, he focused on three routes.

The first was intensive research on gaps that he had identified in the current theory. He mentioned his close reading of papers produced in the 1980s on principal-agent theory by Holmstrӧm – who was sat next to him on the panel. ‘It was a full tree but there were holes and we had to fill in the branches that were missing.’

The second route was to be motivated by the research of other academics, which included the work of Hart and another fellow laureate, Eric Maskin, who was at the Massachusetts Institute of Technology when Tirole was there as a doctoral student. Tirole went on to write a paper, Unforeseen Contingencies and. Incomplete Contracts, with Maskin who had earlier supervised his PhD.

His final route was engagement with practitioners who worked on issues relating to contracts on a daily basis and who asked Tirole questions as an expert that he found he could not answer, motivating him to do further research. ‘My research does not come in a vacuum but it comes from interactions, from being in the right place at the right time,’ he said. ‘We have to listen to people if we are going to learn about our own ignorance.’

The young economists in the packed theatre hall put a range of questions to the laureates including: whether university tenure was an optimal contract; how their subject area had evolved and future areas for research; and bank compensation in the wake of the global financial crisis. Two questioners asked the laureates about who had influenced them and what were the inconvenient questions that young scholars needed to ask.

Hart cited a number of economists including Kenneth Arrow and Gerard Debreu, laureates of an earlier generation who gave their names to the theory of general economic equilibrium, as well as another laureate, Ronald Coase.

Holmström urged young economists to focus on finding answers to small questions that can then be expanded. ‘I have tried to answer some big questions but they have never gone anywhere,’ he joked.

Tirole struck an inspirational final note saying that the Nobel Prize had turned him into a somewhat reluctant public intellectual in his home country of France. ‘You have to help design institutions that are going to be resilient in case a bad president comes to power. Mechanism design is very important,’ he said.

‘You basically get the economic policies that you deserve and our role as economists is to try to explain in simple terms what economics is about. We will get good policies if public opinion is well informed about economics – with all its uncertainties.’



‘Homo Economicus’ Reconsidered

Economists live in an ideological fantasyland. They see people as a collection of reliably rational, utility-maximising, calculating machines.

These ‘econs’ – whom the economists study – never make mistakes, which means their behaviour, when they interact in free markets, can be reliably modelled using a handful of equations that essentially apply the 250-year-old insights of Adam Smith and other classical economists.

That at least is one of the popular conceptions of what economists do.

But a few days at the 6th Lindau Meeting on Economic Sciences shows that this is a gross caricature of the profession.

Daniel McFadden, of the University of California, Berkeley, who won the Nobel Prize in 2000, used his presentation to demonstrate problems with applying the simple models of the likes of Adam Smith and David Ricardo to every issue.

‘We respect what they’ve done but we should always question whether it applies,’ he warned.


Daniel McFadden during his lecture at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Christian Flemming/Lindau Nobel Laureate Meetings

Daniel McFadden during his lecture at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Christian Flemming/Lindau Nobel Laureate Meetings


Peter Diamond of MIT, one of the 2010 Nobel Laureates, showed himself to be under no illusion that people always make decisions that are in their long-term self-interest, citing the example of failures in the private pensions market.

‘Left to their own devices people don’t save enough,’ he told the audience of young economists, pointing to a striking survey of a sample of US baby boomers, showing that almost 80% gave an incorrect answer to a simple question relating to compound interest.

No calculating machines there.

Diamond’s theme was what we can learn from international experience about designing better public and private pension systems – with examples ranging from Chile’s sudden denationalisation of its public pensions scheme to the low-cost and efficient funds available to some three million US civil servants.

Simple economic models, Diamond argued, were a poor basis for setting public policy. ‘Models are by definition incomplete’, he said, ‘so applying them literally would be a serious mistake’.

Sir James Mirrlees, of the Chinese University of Hong Kong and co-recipient of the 1996 Nobel Prize, used his talk to discuss our ‘bounded rationality’ as humans. He pointed out that the choices we make are all influenced not simply by a cold calculation of self-interest but external factors such as education, advertising and experience.

He imparted that his own modelling exercise showed that there were some circumstances where it delivered better outcomes if people were offered no choice, but were simply told what to do. ‘It’s unusual in economics to have a theory that says minimise freedom,’ he noted.


Sir James Mirrlees talking to young economists after his lecture at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

Sir James Mirrlees talking to young economists after his lecture at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings


Robert Aumann, of the Hebrew University of Jerusalem and one of the 2005 Nobel laureates, kicked against the simplistic conception of human beings as utility-maximising machines from another angle.

The central argument of the game theorist’s talk on ‘mechanism design design’ was the imperative of thinking clearly about incentives and motivations.

We don’t, as Aumann stressed, eat because we want to digest food to give us energy to live (the kind of mistake that an economist who believes in calculating ‘econs’ might make about human incentives). We eat because we’re hungry.

Likewise, we don’t generally have sex because we want to propagate the human race. We have sex because it feels good.

If we miss these proximate motivations, we risk misunderstanding what drives human behaviour – and thus getting economics itself wrong.

Warum Finanzminister CO2-Steuern befürworten

“In Deutschland gibt es einen gewaltigen Investitionsstau”, warnt Joachim Käppner von der Sueddeutschen Zeitung. In seinem Artikel prangert er die “[maroden] Schulen, Straßen und Brücken” an, und dass in “der Bundesrepublik (…) Investitionen von mehr als 100 Milliarden Euro” fehlen. Die Ökonomen Pedro Bom und Jenny Ligthart bestätigen Käppners pessimistische Sicht. In einer ihrer Studien zeigen sie, dass fast überall auf der Welt zu wenig in Infrastruktur investiert wird.

Was ist der Grund für diese Unterversorgung? Eine mögliche Erklärung liegt in den notorisch knappen Budgets in den Finanzministerien. Regierungen sind in ihrem finanziellen Handlungsspielraum oft nicht nur durch sehr hohe Staatsschulden eingeschränkt. Sie stehen zusätzlich unter Druck, die Unternehmenssteuern zu senken, um zu verhindern, dass privates Kapital – und damit auch Arbeitsplätze – ins Ausland abwandern.

Unter der immer stärkeren Integration globaler Märkte führt dieser Druck dazu, dass Staaten in einem schädlichen Steuerwettbewerb zueinander stehen. Dem Problem maroder Schulen, Straßen und Brücken steht also ein zweites Problem gegenüber: Es fehlen öffentliche Gelder, um bestehende Infrastruktur zu erhalten und Investitionen in neue Infrastruktur zu tätigen.


Photo/Credit: yio/

Photo/Credit: yio/



Ein CO2-Preis kann helfen, die Probleme des Steuerwettbewerbs und der Unterversorgung öffentlicher Güter zu lösen

Eine unkonventionelle Lösung für die beiden Probleme findet sich in einer meiner Studien, die ein fiskalisches Argument für einen CO2-Preis liefert. Meine Koautoren und ich untersuchen, wie ökonomisch rational agierende Regierungen ihre Steuersysteme reformieren, wenn sie im Wettbewerb um international mobiles Kapital stehen und die Staatskasse klamm ist, aber die öffentliche Infrastruktur dennoch irgendwie finanziert werden muss.

Unsere Ergebnisse zeigen, dass das effizienteste Steuersystem durch die Einführung eines CO2-Preises erreicht werden kann. Um die zusätzlichen Einnahmen klug einzusetzen, gilt es, ein gutes Maß zwischen Steuererleichterungen für die Unternehmensseite einerseits, und der Finanzierung der öffentlichen Infrastruktur andererseits zu finden. Gelingt dies, profitieren Wirtschaft und Gesellschaft als Ganzes. Der Schutz der Umwelt und die Belebung der Wirtschaft können gleichzeitig gelingen.

Wie lässt sich unser Resultat begründen? Auf den ersten Blick scheint es doch so, als würden sowohl eine CO2– als auch eine Unternehmenssteuer die Wirtschaft gleichermaßen belasten. Beide Instrumente erhöhen die Kosten für Unternehmen, was dazu führen könnte, dass diese ihre Aktivität zumindest teilweise ins Ausland verlagern.

Ein CO2-Preis hat jedoch den entscheidenden Vorteil, dass die Steuerlast nicht auf Unternehmen fällt, die Güter und Dienstleistungen anbieten, sondern auf die Besitzer fossiler Ressourcen wie Öl oder Gas. Auf diese Weise schöpft ein CO2-Preis die “Ressourcen-Rente” ab – der Anteil des Profits der Ressourcenbesitzer, der über die Kosten hinausgeht, die entstanden, um die Ressource zu extrahieren und auf den Markt zu bringen. (Der Economist erklärt das Konzept der Renten anhand eines anderen Beispiels, nämlich das des Einkommens eines Profi-Fußballers.)

Das Potential der Unternehmensbesteuerung, Renten abzuschöpfen, ist weitaus geringer. Unternehmen, die kein Monopol haben, sondern stark miteinander im Wettbewerb stehen, können kaum Renten-Einkommen, also Einnahmen, die über ihre Produktionskosten hinausgehen, vorweisen. Gelänge es einem Unternehmen, außergewöhnlich hohe Einnahmen zu erwirtschaften, würde der Wettbewerb automatisch dazu führen, dass die Konkurrenz alle Anstrengungen unternimmt, um ähnliche Einnahmen zu erzielen. In der Folge fallen solche hohen Einnahmen wieder.

Ein nationaler CO2-Preis schöpft zwar die Ressourcen-Renten ab, aber im Prinzip kann er so gestaltet werden, dass er das effiziente Funktionieren der Märkte nicht beeinträchtigt, d.h. dass er die Preissignale privater Marktteilnehmer nicht verzerrt – im Gegensatz zu Unternehmenssteuern, die sich negativ auf private Investitionen auswirken. Ein Grund mehr, weshalb ein CO2-Preis ein effizientes Instrument darstellt, um öffentliche Einnahmen zu generieren.


Selbst wenn ein CO2-Preis nur zur Finanzierung des Staatshaushalts eingeführt wird, hilft er, gefährlichen Klimawandel zu vermeiden

Nehmen wir nun an, dass Finanzminister tatsächlich die vorgeschlagene Steuerreform durchführen und den Staatshaushalt sanieren können. Besteht nun nicht die Gefahr, dass die Besitzer fossiler Ressourcen stetig steigende CO2-Preise erwarten und aus Angst vor der zukünftig niedrigeren Nachfrage erst recht viele Ressourcen abbauen und den Markt mit billigem Öl und Gas fluten? Dann hätte ein CO2-Preis die paradoxe Wirkung, genau das Gegenteil dessen zu erreichen, wozu er ursprünglich gedacht war. Vor einer derart widersprüchlichen Situation hatte Hans-Werner Sinn in seinem Buch “Das grüne Paradoxon” bereits gewarnt.

Die Antwort ist jedoch ein klares Nein: Wird ein CO2-Preis verwendet, um Infrastruktur-Investitionen zu finanzieren, wirkt sich dies sowohl auf das Angebot, als auch die Nachfrage nach fossilen Ressourcen aus. Auf der Angebotsseite wird weder mehr, noch schneller extrahiert, da der CO2-Preis lediglich die Ressourcen-Rente abschöpft, aber die Märkte – und damit die Entscheidungen privater Marktteilnehmer – nicht verzerrt. Daher bestimmt die Nachfrageseite vollständig, wann und wieviel der fossilen Ressourcen abgebaut werden. Käufer sehen durch den CO2-Preis höhere Kosten, was die Nachfrage reduziert und schließlich den Abbau fossiler Ressourcen reduziert.

All dies bedeutet nicht, dass globale Kooperation nicht nötig ist, um das Klima zu retten. Eine unilaterale Steuerreform, die einen CO2-Preis beinhaltet wird nicht ausreichen. Aber wenn Politiker, und insbesondere die Finanzminister, verstehen, dass eine ökologische Steuerreform der ganzen Wirtschaft nützt, dann können fiskalische Motive tatsächlich einen Einstieg in ambitionierteren Klimaschutz darstellen.

This blog post is based on research reported in ‘Why Finance Ministers Favor Carbon Taxes, Even If They Do Not Take Climate Change into Account’ by Max Franks, Ottmar Edenhofer and Kai Lessmann, published in Environmental and Resource Economics in 2015. The study was recognised as the ‘best overall paper’ at the third annual conference of the Green Growth Knowledge Platform, hosted in partnership with the United Nations Environment Programme (UNEP), the OECD and the World Bank.

Elderly Europe

Picture/Credit: JodiJacobson/

Picture/Credit: JodiJacobson/


Europe is growing old. We tend to regard Japan’s old age dependency problem as exceptional: but populations are also ageing rapidly across the whole of Europe. Persistently low birth rates in many countries, coupled with rising longevity due to improvements in healthcare and nutrition, is increasing the proportion of elderly to working-age people. In some countries, this is exacerbated by emigration of the young.

Germany’s population is already the second oldest in the OECD. In 2015, there were about 35 people aged 65 and older for every 100 working-age adults: the OECD predicts that by 2060, this proportion will have doubled. Portugal’s population is ageing even faster: the ratio of over-65s to working-age adults is projected to rise from about 32% at present to over 75% by 2075.

Nor is population ageing limited to Eurozone countries. Poland, currently a comparatively young country, is ageing faster than Germany or Portugal: the OECD forecasts that its old age dependency ratio will hit 57% by 2075.


OECD (2015), Demographic old-age dependency ratios: Historical and projected values, 1950-2075, in Pensions at a Glance 2015, OECD Publishing, Paris.

Demographic old-age dependency ratios: Historical and projected values, 1950-2075, in Pensions at a Glance 2015, OECD Publishing, Paris.

Population ageing is slowest in Scandinavian countries and France, where birth rates are higher than in Germany. But even in these countries, the birth rate is below the OECD replacement rate of 2.1 children per woman and the old age dependency ratio will reach nearly 50% by 2075.

Europe is slowly recovering from the crises of recent years. GDP growth is resuming, though at a glacial pace, and unemployment is gradually falling. But the rapid demographic shift raises serious questions about future prosperity. State pension ages are rising across Europe, to 67 and beyond, and many people are choosing to work on beyond their state pension age. The OECD’s definition of ‘old age’, which presumes complete withdrawal from the workforce at 65, may already be out of date.

But raising the age at which people can claim their state and occupational pensions is extremely unpopular with voters, and it is often fiercely resisted. Many older people have a deeply entrenched belief that they have paid for these pensions, so raising the age at which they can take them is a form of theft.

The dependency of those who are not working on those who are is not widely understood, and governments have made little attempt to explain it. The likelihood is, therefore, that pension ages will not rise as much as increases in longevity suggest that they should.

Poland has even reduced its state pension age recently and reintroduced an early pension for women, for which it may face a legal challenge by the EU. Whether these changes are affordable does not concern those who expect to receive their pensions at the age ‘promised’ when they started work half a century ago.


Demographic old-age dependency ratios: Historical and projected values, 1950-2075, in Pensions at a Glance 2015, OECD Publishing, Paris.

Demographic old-age dependency ratios: Historical and projected values, 1950-2075, in Pensions at a Glance 2015, OECD Publishing, Paris.

It is already clear, however, that affordability will be a problem. Germany, for example, is projected to spend 12.5% of GDP on pensions by 2050. Elderly people also make high demands on health and social care services: as the proportion of elderly in the population grows, the cost of these services for working-age adults will inevitably rise. The picture is one of a growing tax burden on a shrinking workforce.

Even if people accept the need to work for much longer, there will be structural changes to the economy from the demographic shift. Older people tend not to be as productive as younger: to some extent, this is offset by greater knowledge and experience, but as cognitive faculties start to decline, this effect diminishes.

Older people are also more likely to work part-time, to eschew work that takes them away from home, and to have health problems or caring responsibilities that restrict the types of work they can undertake. As the proportion of older people in the economy grows, therefore, we might expect poorer productivity, which if not addressed would result in persistently lower GDP growth. Countries need to invest in technology that raises productivity, particularly among those who have physical and mental limitations.

But from the point of view of Germany’s ageing population, ensuring their futures should be the top priority of their government, even if it means pursuing policies that, by stealing demand from other countries, make it more difficult for them to provide for their own people. This is understandable, but it is not sustainable. For it is not just Europe that is ageing: it is three quarters of the world.

If only a few countries were experiencing rapid population ageing, and the rest had young and growing populations, then for those countries to pursue policies aimed at maintaining a high saving ratio and a large current account surplus would make sense.

After all, young and growing populations tend to have excess demand, so an ageing population can siphon off some of it with impunity – indeed, this might help younger countries to control inflation. But when most of the countries in the world are ageing rapidly, policies that rely on demand from other countries are beggar-my-neighbour policies.

The IMF recently expressed concern that the US, and to a lesser extent the UK, are acting as ‘consumers of last resort’, running large current account deficits to mop up their excess savings. ‘While the rotation of excess imbalances toward advanced economies – with deficits increasingly concentrated in the United States and United Kingdom – likely entails lower deficit-financing risks in the near term,’ the IMF said, ‘the increased concentration of deficits in a few economies carries greater risks of disruptive trade policy actions.’ It called on countries with ‘fiscal space’ to rely less on monetary stimulus and to spend more.

Understanding and planning for the challenges of an ageing population requires international cooperation, not competition. We need to have an adult conversation about how the needs of the old can be made affordable for the children and the unborn who have no voice in this debate but will bear the consequences of our decisions in years to come.


Frances Coppola was speaking on a panel with Nobel Laureates and young economists during a press talk at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meeting

Frances Coppola was speaking on a panel on the future of the European economy with Nobel Laureates and young economists during a press talk at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

Housing Talk: Why You Should Never Trust a House Price Index (Only)

An ever growing housing market? Picture/Credit: G0d4ather/

An ever growing housing market? Picture/Credit: G0d4ather/


Whenever I attend a dinner party or wedding or just meet old friends for coffee, at some point the topic turns to house prices, real estate investment and what seems to be generally perceived as a boom in the housing market. It seems that almost everyone is interested in buying a house or apartment. Often the aim is not just to cover the basic human need for shelter, but also to participate in the assumed never-ending boom and grab a small piece of the rapidly growing housing cake. House prices never fall, right?

People enthusiastically tell me stories of friends (or friends of friends) who finance multiple properties entirely via loans with zero down-payment. After all, real estate investment is a safe haven, isn’t it? And the expected rent will more than cover the monthly loan instalment, won’t it?

The figure show a rental price (right) index for Sydney together with quality-adjusted rental and sales price distributions. Credit: Sofie R. Waltl

The figures show a rental price index (top) for Sydney together with its quality-adjusted rental price distribution (bottom). Credit: Sofie R. Waltl

But wait, my experience of obsessive ‘housing talk’ may be biased in at least three ways. First, I’m in my late twenties and so are my friends. Thinking about buying property is common, even necessary, for my age (and socioeconomic) group. Key decisions for the rest of our lives need to be made: should I stay in my first job or get (another) postgraduate degree? Should I go abroad and try out the expat life? Should I marry or break up with my long-term boy/girlfriend? What about kids? And hey, where and how will I live? Which leads to the obvious next question: to rent or to buy.

Second, I wrote a PhD thesis about housing markets. Although I focused on better ways of measuring dynamics in housing and rental markets and mainly dealt with technical problems in statistical modelling of such markets, most of my friends tend (wrongly) to conclude that I am an expert in real estate investment. Naturally, I end up being asked for advice about housing markets more often than most.

Third, as a native Austrian currently living in Germany, I mainly come across people for whom dramatic changes in house prices are a new phenomenon. After years of generally flat house prices, these countries have only recently seen bigger shifts.

Still, housing markets seem to be a hot topic and I rarely meet someone who’s not at all interested. I believe that widely reported changes in house price indices are the main reason for that.

In his famous book Irrational Exuberance, Nobel laureate Robert Shiller describes how first the US stock market (near its peak in 1999) and then the US housing market (around 2004) became socially accepted topics of conversation with broad media coverage. In fact, he writes, whenever he went out for dinner with his wife, he successfully predicted that someone at an adjacent table would speak about the respective market.

Shiller is well-known for his analysis of markets driven by psychological effects, which help to explain observed developments that a theory based on full rationality would rule out. Although most people are aware of housing bubbles of the recent past – for example, in Ireland, Japan, Spain and the United States – the belief in real estate as a quasi risk-free investment seems to remain unquestioned. The fact that sharp and sudden drops in prices are possible and happen regularly is widely ignored. 

The figure shows a sales price index for Sydney together with quality-adjusted rental and sales price distributions. Credit: Sofie R. Waltl

The figures show a sales price index (top) for Sydney together with its quality-adjusted sales price distribution (bottom). Credit: Sofie R. Waltl

Everyone is affected by movements in housing and rental markets. If someone owns a property, it is usually her single largest asset; if someone rents, the cost often takes up a large fraction of her monthly income. This is why turbulence in these markets has larger effects on households than, for example, swings in the stock market (Case et al, 2005). The social implications of skyrocketing house prices and exploding rents but also of crashing markets are huge – which means that these markets need to be closely watched by policy-makers.

A house price index measures average movements of average houses in average locations belonging to an average price segment – a lot of averages! It is usually heavily aggregated, which implies that just because a national house price index reports rising prices, not every house will benefit equally from these increases. In fact, there is large variation in the distributions of prices and rents, and these distributions also change significantly over time.

Houses are highly heterogeneous goods (particularly compared with shares or bonds): no two houses are the same. Therefore, house price indices should be quality-adjusted, with differences in house characteristics taken into account. Still, changes in house price indices are often driven by developments in certain sub-markets, which are mainly determined by the three most important house characteristics: location, location, location. 

Hence, house price developments are extremely heterogeneous even within urban areas (see McMillen, 2014, Guerrieri et al, 2013, and Waltl, 2016b), and thus the interpretation of aggregated national or even supra-national indices is questionable. For example, the S&P/Case-Shiller US National Home Price Index reports changes for the entire United States, the ECB and EUROSTAT publish indices for the European Union and the euro area, and the IMF even produces a global house price index.

Missing bubbly episodes in sub-markets when looking at such heavily aggregated figures seems unavoidable; and basing an individual investment decision on them is dubious. Similarly problematic is the assessment of a housing market using such aggregated measures for financial stability purposes.

Price map showing the average price (in thousand AUD) for an average house for different locations over time in Sydney. Credit: Sofie R. Waltl

Price map showing the average price (in thousand AUD) for an average house for different locations over time in Sydney. Credit: Sofie R. Waltl

A typical pattern is that markets for low-quality properties in bad locations experience the sharpest rises shortly before the end of a housing boom. Look at the lowest price segment in Sydney’s suburbs (black, dashed line) compared with the highest price segment in the inner city (orange, dotted line) around the peak in 2004. It is also this segment that experiences the heaviest falls afterwards.

A possible behavioural explanation is as follows: the longer a housing boom lasts, the more people (and also the more financially less well-off people) want to participate in this apparently prosperous and safe market. Steady increases reported by house price indices give the impression that the entire market is booming with no end in sight. Whoever is able to participate becomes active in the housing market and investments boom in yet more affordable properties – the lowest segment in bad locations.

A common misconception is the assumption that rising house prices necessarily translate into higher rents almost immediately. But when the price contains a ‘bubble or speculative component’, this is not always the case.

In general, economists speak of a bubble whenever the price of an asset is high just because of the hope of future price increases without any justification from ‘fundamentals’ such as construction costs (Stiglitz, 1990). Investing in over-valued property and hoping for the rent to cover the mortgage is thus more dangerous than it might appear (see Himmelberg et al, 2005, for the components of the price-to-rent ratio measuring the relationship between prices and rents; and Martin and Ventura, 2012, for asset bubbles in general).


The figure shows location- and segment-specific indices for Sydney. CBD refers to the Central Business District. Credit: Sofie R. Waltl

The figure shows location- and segment-specific indices for Sydney. CBD refers to the Central Business District. Credit: Sofie R. Waltl


While we’ve already seen that price developments are very diverse, the same is also true for the relationship between prices and rents. Thus, simply looking at average price-to-rent ratios may miss the over-heating of a sub-market and its associated risks.

Credit: Sofie R. Waltl

Credit: Sofie R. Waltl

Buying property is thus more delicate than urban legends about the safety of real estate investment suggest. Above all, developments in housing markets are diverse even within small geographical areas and one number alone can never appropriately reflect what is going on. A complete picture of the dynamics in housing markets is essential from the perspective of an investor as well as a policy-maker.

And in case you’re hoping for investment advice, here’s the only piece I can offer: just because everyone buys does not mean that YOU should go out and buy whatever you can afford. In fact, when everyone (including your friend with questionable financial literacy) decides to invest in real estate, it might be exactly the wrong moment. Never rely on house price indices only, but go out and collect as much information as possible. And don’t forget: location, location, location… 



The figures show quality-adjusted developments in the Sydney housing market, and are part of the results of my doctoral thesis Modelling housing markets: Issues in economic measurement at the University of Graz under the supervision of Robert J. Hill. I am very grateful for his valuable support and advice. Calculations are based on data provided by Australian Property Monitors. Results, which this article is based on, are published as Waltl (2016a) and Waltl (2016b). The part about price-to-rent ratios is currently under review at a major urban economic journal (here is a working paper version). My work has benefitted from funding from the Austrian National Bank Jubiläumsfondsprojekt 14947, the 2014 Council of the University of Graz JungforscherInnenfonds, and the Austrian Marshallplan Foundation Fellowship (UC Berkeley Program 2016/2017). The views presented here are solely my own and do not necessarily reflect those of any past, present or future employer or sponsor.

Europa: Gefahr in Verzug?

Die Erholung der Eurozone gestaltet sich fragil und Europa steht weiterhin vor zahlreichen wirtschaftlichen Herausforderungen, so der Nobelpreisträger Sir Christopher Pissarides bei einem Pressegespräch auf der 6. Lindauer Tagung der Wirtschaftswissenschaften am Mittwoch, den 23. August 2017.

Die Weigerung Deutschlands, trotz riesiger Haushalts- und Handelsbilanzüberschüsse mehr zu investieren, hemmt das Wachstum in anderen Ländern der Eurozone, argumentierte er. Seiner Ansicht nach sind die Entscheidungen der deutschen Politik ausschließlich von den Interessen der deutschen Wirtschaft und nicht der Eurozone geleitet. Noch immer überschattet Austerität die wirtschaftliche Wiederbelebung.

Und weitere Gefahren liegen laut Professor Pissarides vor uns. Dazu zählen Risiken für den Finanzsektor, die darauf zurückzuführen sind, dass die Eurozone ihre Reformen im Bankensektor nicht zum Abschluss gebracht hat, und die Tatsache, dass Europa im Produktivitätswachstum hinter seinen Konkurrenten aus den Vereinigten Staaten und Fernost hinterherhinkt.


Press Talk at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

Pressegespräch während der 6. Lindauer Tagung der Wirtschaftswissenschaften: Veronika Stolbova, Lenka Fiala, Eric Maskin, Romesh Vaitilingam, Chris Pissarides und Frances Coppola (von links). Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings


Im Bankwesen bleibt trotz Einführung eines neuen Abwicklungsverfahrens unklar, wer für die Rettung einer Großbank, deren Zusammenbruch droht, aufkommen würde. Die Fragilität des gesamten Bankensektors bereitet weiterhin Sorgen und hat übermäßige Regulierungen zur Folge.

Laut Professor Pissarides hängt das langfristige Wachstum in Europa von angebotsorientierten Reformen ab, die zu Infrastrukturinvestitionen ermuntern – und zwar nicht nur in Straßen und Brücken, sondern auch in innovationsfördernde digitale Technologien. Optimistischer fiel seine Einschätzung der in einigen Ländern zu beobachtenden Veränderungen in den Arbeitsmärkten aus, die seines Erachtens langfristig zur Verringerung der Arbeitslosigkeit beitragen. Allerdings könnte es mehrere Jahre dauern, bis sich die Reformen bemerkbar machen.

Eine radikale strukturelle Änderung schlug Nobelpreisträger Eric Maskin in der Diskussionsrunde vor. Sie soll die Entkopplung der europäischen Geldpolitik, die für die Eurozone als Ganzes festgelegt wird, von der auf nationaler Ebene geregelten Finanzpolitik adressieren. Durch Einrichtung eines unabhängigen Finanzrates nach dem Modell der Europäischen Zentralbank, so meinte er, ließe sich die Einflussnahme der Politiker ausklammern.


Eric Maskin during the Press Talk at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meeting

Eric Maskin während des Pressegesprächs. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meeting


Im Rahmen einer solchen Regelung würden Experten, die von den europäischen Regierungen ernannt werden, aber nicht deren Kontrolle unterliegen, künftig unter Beachtung eines vereinbarten Regelwerks für jedes Land Haushaltsüberschuss- oder -defizitziele festlegen. Den einzelnen Ländern würde dann die Entscheidung überlassen, wie sie diese Ziele erreichen wollen und welche Gewichtung zwischen Besteuerung und öffentlichen Ausgaben sie wählen. Professor Maskin räumte allerdings ein, dass es wohl eine enorme Herausforderung darstellen würde, Deutschland von der Umsetzung solcher Maßnahmen zu überzeugen.

Die Journalistin Frances Coppola brachte die deutsche Handlungsweise mit einer weiteren enormen Problematik für Europa in Zusammenhang: der rasanten Bevölkerungsalterung und der somit notwendigen Vorsorge für eine Wirtschaft mit weniger Erwerbstätigen als Nichterwerbstätigen. Die Reaktion Deutschlands auf den eigenen Haushaltsüberschuss sei vor diesem Hintergrund vernünftig, sagt Coppola.

Veronika Stolbova, eine der Nachwuchsökonomen, die an der Lindauer Tagung teilnehmen, wies auf eine weitere langfristige Gefahr für die Eurozone hin: die finanziellen Auswirkungen des Klimawandels. Ihre eigenen Forschungsergebnisse legen nahe, dass die Erträge von institutionellen Anlegern, beispielsweise Investmentfonds und Pensionsfonds, unter Investitionen in Industrien, die von den negativen Folgen des Klimawandels betroffen sind, leiden könnten.

Auch die Frage nach der politischen Führungsrolle spielte stark in die Diskussion über die künftige Richtung der Eurozone hinein. Professor Pissarides argumentierte, dass auf europäischer Ebene kein hochrangiges politisches Forum existiert, das sich um langfristige Wirtschaftsfragen kümmern könnte. Die Eurogruppe, so führte er aus, sei nur auf kurzfristige Krisenlösungen konzentriert.

Professor Maskin und Professor Pissarides waren sich einig, dass Veränderungen nur erreicht werden könnten, wenn Führungspersönlichkeiten mit einer großen Vision, die nationale Grenzen überwindet, auf der Bildfläche erscheinen – wie in der Vergangenheit ein Jean Monnet, Wegbereiter der EU, oder ein General George Marshall, dessen Marshall-Plan nach dem Zweiten Weltkrieg zum Wirtschaftsaufschwung in Europa führte. Solange solche Führungspersönlichkeiten ausbleiben, werden sich die langfristigen strukturellen Probleme der europäischen Wirtschaft in absehbarer Zeit nicht lösen lassen.

#LiNoEcon Daily Recap – Wednesday, 23 August

On Wednesday, #LiNoEcon was inaugurated with a keynote by ECB President Mario Draghi, followed by the first full day of the meeting programme with lectures and seminars. In the evening, young economists and laureates mingled at the Get-Together in Friedrichshafen, where Federal Minister Peter Altmaier welcomed the participants on behalf of the German government, stressing that the young economists were the ‘hope of the universe’.


Video of the day:

The Keynote by ECB President Mario Draghi during the opening ceremony


Picture of the day:

ECB President Mario Draghi talking to young economists after the opening ceremony

6th Lindau Meeting on Economic Sciences

For even more pictures from the Lindau Nobel Laureate Meetings, past and present, take a look at our Flickr account.


Blog of the day:


Euro area

On the Future of the Euro Area: #LiNoEcon young economist Benjamin Schäfer suggests ways to overcome the weaknesses in Europe’s monetary union.

Do take a look at more of our inspring blog posts.


Tweets of the day:











Last but not least, follow us on Twitter @lindaunobel and Instagram @lindaunobel and keep an eye out for #LiNoEcon.

We will keep you updated on the 6th Lindau Meeting on Economic Sciences with our daily recaps. The idea behind it is to bring to you the day’s highlights in a blink of an eye. The daily recaps will feature blog posts, photos and videos from the mediatheque.

Good Pension Design

Photo/Credit: laflor/

Photo/Credit: laflor/


Ask anyone under the age of 25 about pensions and – unless they are young economists – they will probably yawn, raise their eyes heavenwards and change the subject. This is despite the fact that the provision of an adequate income in retirement is one of the most important obligations on any government wishing to prevent their senior citizens falling into poverty.

As the British economist (Lord) Nicholas Stern put it: ‘A key test of a decent society is the living standards of its older people, particularly the poorer among them.’ Yet many societies in both the developed and developing world fail that test.

For this reason, Professor Peter Diamond, the recipient of the 2010 Nobel Prize in Economic Sciences, has devoted much of the last decade to analysing the differences between different pensions systems.

According to Professor Diamond, economics recognises the multiple objectives of pension plans: smoothing spending across a lifetime; providing financial insurance; poverty relief; and redistribution.

‘It starts with a simple framing: what are we trying to do with a pensions system? It’s economic security in old age and it has multiple objectives and calls for multiple policies’, he told the audience of young economists in Lindau, adding that basic economics has its limitations when applied to pensions.

The reality is that most people do not save enough for their retirement. This creates what Professor Diamond calls ‘a paternalistic need’ to use policy measures to encourage people to save more during their working lives.

Finding that solution has proved hard because governments naturally seek to find a unified solution that will meet the needs of a highly diversified population, with different needs for different groups of people, most notably the different needs of male and female workers. The downward trend in workers’ earnings and increasingly ageing populations only add to that need.

Policy-makers have trouble when it comes to pensions design because of a number of limitations. Chief among these are high levels of financial illiteracy. For example, a survey found that four of five people (78%) in the US do not understand compound interest, while Arthur Levitt, the head of the Securities and Exchange Commission in the 1990s, famously warned that more than half of Americans do not know the difference between a stock and a bond.


Peter Diamond during his lecture at the 6th Lindau Meeting on Economic. Photo/Credit: Christian Flemming/Lindau Nobel Laureate Meetings

Peter Diamond during his lecture at the 6th Lindau Meeting on Economic Sciences. Photo/Credit: Christian Flemming/Lindau Nobel Laureate Meetings


Professor Diamond said that the products designed by some financial firms are based on that low level of understanding. ‘There are signs that financial firms use complexity to hide financial risk. Obfuscation is something that is often highly profitable.’ This has perhaps enabled firms to claw back a lot of money through annual charges, where a 1% management fee that might look miniscule on paper in fact ends up taking almost 20% of the value of the funds after 40 years.

This is important given that increasing pressure on public finances means that governments are keen to lower the costs of direct state provision and increase the role of the private sector. The most commonly used plan is the defined contribution pensions where employers and/or employees pay money into pension funds, the value of which the workers only discover when they retire and convert their pension pots into an annuity.

Professor Diamond highlighted some countries that have worked to improve the retirement outcomes of their citizens. Chile, for example, scrapped a poor existing pensions system and replaced it with individual savings accounts.

But the Chilean policy-makers discovered that private sector competition was insufficient to deliver the best outcome. Confidence in the system was undermined by the fact that it was put in place by an unelected military dictatorship; and the fact that many people worked on the black market and did not contribute. In 2008, the government added a scheme that was aimed at people who were getting little out of the current system.

Sweden also scrapped its system in the 1980s and replaced it with a contributory system in which the government collected the payments and handled the record system, but around 850 companies were allowed to offer products. When it became clear that many people would not or could not choose, the government set up a default system that ultimately became an option which half of Swedes choose because it is well designed, carries a low cost and includes an asset allocation strategy that reduces risk as workers near retirement.

Professor Diamond’s final example was the US Thrift Savings Plan for more than three million civil servants, which has low costs because it is dealing with a single employer that processes all salary transactions electronically. More significantly, it was set up with five mutual funds that each carries out a regular bidding process for private firms to run them, which also reduces the management cost.

Perhaps the main takeaway from Professor Diamond’s lecture was that countries with a good system are the ones that have kept working at it. As he concluded: ‘This is the reason why I find working on pensions very satisfying and very important.’

Europe: Dangers Ahead?

The Eurozone recovery is fragile, with Europe still facing many economic challenges, according to Nobel Laureate Sir Christopher Pissarides speaking at a press briefing at the 6th Lindau Meeting on Economic Sciences on Wednesday 23 August.

The refusal of Germany to spend more – despite large budget and trade surpluses – is inhibiting growth in other Eurozone countries, he argued. Germany’s policy, he suggested, is driven purely by political decisions that relate to the German economy, not the Eurozone. Austerity is still overshadowing the recovery.

Other dangers lie ahead, Professor Pissarides added. They include the risk to the financial sector, due to the failure of the Eurozone to complete banking reform, and the fact that Europe is lagging behind its rivals in the United States and the Far East in terms of productivity growth.


Press Talk at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

Press Talk at the 6th Lindau Meeting on Economic Sciences: Veronika Stolbova, Lenka Fiala, Eric Maskin, Romesh Vaitilingam, Chris Pissarides and Frances Coppola (from left). Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings


In banking, despite the introduction of a new resolution mechanism, it remains unclear who would bear the burden of bailing out a major bank that was about to fail. And there are still worries about the fragility of the banking system as a whole, leading to excessive regulation.

Professor Pissarides said that the long-term growth of Europe will depend on supply-side reforms that encourage investment in infrastructure – not just roads and ports but also digital technologies to encourage innovation. He was more optimistic about changes in labour markets in some countries, which he thought would have the long-term effect of reducing unemployment though it would take a number of years before the reforms worked through.

Nobel Laureate Eric Maskin had a radical suggestion for a structural change to address the disconnect between European monetary policy, which is determined for the Eurozone as a whole, and fiscal policy, which is determined at a national level. He said that politicians could be taken out of the equation by the creation of an independent fiscal board modelled on the structure of the European Central Bank.


Eric Maskin during the Press Talk at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meeting

Laureate Eric Maskin during the Press Talk at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meeting


Under such an arrangement, experts, appointed by European governments but not subject to their control, would draw up targets for budget surpluses or deficits for each country, using an agreed set of rules. Countries would be free to decide how to meet those targets, and what balance of taxation and spending they wanted to adopt. Professor Maskin conceded that convincing Germany to adopt such measures would be a considerable challenge.

Financial journalist Frances Coppola suggested that Germany’s action was also driven by another of the big challenges facing Europe: the rapid ageing of its population and the need to make provision for an economy where there would be fewer workers relative to dependents. She suggested that Germany’s response to its budget surplus is rational when this is taken into account.

Veronika Stolbova, one of the young economists participating in the Lindau Meeting, pointed out another long-term danger for the Eurozone: the financial effects of climate change. Her research suggests that it is institutional investors – such as mutual funds and pension funds, whose income could be damaged by investing in industries – that could be negatively affected by climate change.

The question of political leadership loomed large in a discussion of the way forward for the Eurozone. Professor Pissarides argued that there was no high-level political forum at the European level that could look at long-term economic issues. The Eurogroup, he said, is focused only on short-term crisis resolution measures.

Professors Maskin and Pissarides agreed that change could only come about if there were leaders prepared to step up with a big vision that transcended national boundaries – such as the founder of the EU, Jean Monnet, or General George Marshall, whose Marshall plan led to Europe’s economic recovery after World War II. But with no such leaders in the sight, the long-term structural problems of the European economy will not be resolved any time soon.


This post is also available in German.

#LiNoEcon Daily Recap – Tuesday, 22 August

On Tuesday, #LiNoEcon kicked off with first meet and greets, registrations, guided tours through the Lindau Science Trail and the Paul Klee exhibition and various dinners for laureates, young economists and guests. Even though the grand opening of the 6th Lindau Meeting on Economic Sciences takes place on Wednesday, we already have some highlights:


Video of the day:

Enjoy the first glimpse of #LiNoEcon! Many more to follow.


Picture of the day:

Tuesday afternoon we showed the young economists our new Science Trail. More than 40 participants gathered at the pylon outside of the city theatre and followed the guided tour over sunny Lindau island.


For even more pictures from the Lindau Nobel Laureate Meetings, past and present, take a look at our Flickr account.


Blog of the day:

A refugee success story from rural Australia: #LiNoEcon young economist David Smerdon on the remarkable transformation of the small town of Nhill

Refugees Slider

Do take a look at more of our inspring blog posts.


Tweets of the day:





Last but not least, follow us on Twitter @lindaunobel and Instagram @lindaunobel and keep an eye out for #LiNoEcon.

We will keep you updated on the 6th Lindau Meeting on Economic Sciences with our daily recaps. The idea behind it is to bring to you the day’s highlights in a blink of an eye. The daily recaps will feature blog posts, photos and videos from the mediatheque.