Sun, Sep 04, 2016 page15

• Economists find fresh challenges in Silicon Valley

  • By Steve Lohr / NY Times News Service
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  For eight years, Peter Coles had an economist’s dream job at Harvard Business School.

  His research focused on the design of efficient markets, an important and growing field that has influenced such things as US Treasury bill auctions and decisions on who receives organ transplants. He even got to work with Alvin Roth, who won a Nobel Prize in economic science in 2012.

  However, prestige was not enough to keep Coles at Harvard. In 2013, he moved to the San Francisco Bay Area. He now works at Airbnb, the online lodging marketplace, one of a number of tech companies luring economists with the promise of big sets of data and big salaries.

  Silicon Valley is turning to the dismal science in its never-ending quest to squeeze more money out of old markets and build new ones. In turn, the economists say they are eager to explore the digital world for fresh insights into timeless economic questions of pricing, incentives and behavior.

  “It’s an absolute candy store for economists,” Coles said.

  The pay, of course, is a lot better than you would find in academia, where economists typically earn US$125,000 to US$150,000 a year. In tech companies, pay for a Ph.D. economist will usually come in at more than US$200,000 a year, the companies say. With bonuses and stock grants, compensation can easily double in a few years. Senior economists who manage teams can make even more.

  Businesses have been hiring economists for years. Usually, they are asked to study macroeconomic trends — topics like recessions and currency exchange rates — and help their employers deal with them.

  However, what the tech economists are doing is different: Instead of thinking about national or global trends, they are studying the data trails of consumer behavior to help digital companies make smart decisions that strengthen their online marketplaces in areas like advertising, movies, music, travel and lodging.

  Tech outfits, including giants like Amazon, Facebook, Google and Microsoft and up-and-comers like Airbnb and Uber, hope that sort of improved efficiency means more profit.

  Understanding how digital markets work is getting a lot of attention now, Google chief economist Hal Varian said.

  However, “I thought it was fascinating years ago,” he added.

  Varian, 69, is the godfather of the tech industry’s in-house economists. Once a well-known professor at the University of California, Berkeley, Varian showed up at Google in 2002, part-time at first, but soon became an employee. He helped refine Google’s AdWords marketplace, where advertisers bid to have their ads shown on search pages, based on the words users type into Google’s search engine.

  Google’s insight was to avoid giving the best ad placement to the highest bidder. Varian worked to develop a different model for ad placement, calculating the probability that a user will click on an ad and find the ad relevant. It was a classic example of smart market design.

  Since then, Varian and his team have applied their economic perspective to Google’s ad markets, the company’s unusual auction for its initial public offering, bidding strategies for wireless spectrum, patent auctions and purchases, and models for new businesses like driverless cars.

  For the moment, Amazon seems to be the most aggressive recruiter of economists. It even has an Amazon Economists Web site for soliciting resumes. In a video on the site, Amazon chief economist Patrick Bajari says the economics team has contributed to decisions that have had “multibillion-dollar impacts” for the company.

  Another Amazon jobs site lists openings for economists. As of Friday, there were 34.

  Seeing this emerging job market, the National Association for Business Economics held its first meeting for technology company economists in April in San Francisco. Another is set for next month in Silicon Valley.

  Academia is also starting to take notice — and adapt.

  “It’s all happening so fast, it’s hard to keep up,” said Susan Athey, an expert in the economics of technology at the Stanford Graduate School of Business who is also a consultant to Microsoft.

  Many economics students also take computer science courses, and some major in both. However, a new course this fall at Yale, called Designing the Digital Economy, seeks to blend economics and computer science in the way digital economists do at tech companies.

  The instructor is Glen Weyl, an economist at Microsoft Research, and the course will have guest lecturers from Amazon, Pandora and Uber.

  The course is a pilot for curriculum change and perhaps a joint degree program focused on digital markets and their design. Yale economics department chairman Dirk Bergemann explained that economics was concerned with efficiency, prices and incentives, while computer science focused on algorithms and complexity.

  “In digital marketplaces, you are trying to address both sets of problems,” he said.
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