Back to the Main ET Page
Heckman and McFadden: Revolutionaries in Empirical Microeconomics
If you wanted to predict the Nobel Prize winners, your best bet would be to look among the winners of the John Bates Clark Medal. Starting with Paul Samuelson in 1947, this medal has been awarded every other year (except 1953) to the most outstanding American economist under forty. Of the first seven winners of the medal, six—Samuelson, Milton Friedman, James Tobin, Kenneth Arrow, Lawrence Klein and Robert Solow—became early recipients of the Nobel Prize.
James Heckman of
the University of Chicago and Daniel McFadden of the University of
California, Berkeley, the winners of this year’s Nobel Prize, are both
recipients of the Clark Medal: Heckman in 1983 and McFadden in 1975.
Thus, there is little surprise in the fact that they have been
awarded the coveted prize. The
surprise lies, instead, in the fact that by opting for these younger
applied econometricians, the Royal Swedish Academy of Sciences has passed
on two other econometricians who have been regarded worthy claimants of
the prize: Marc Nerlov of the University of Maryland and Dale Jorgenson of
Harvard University, who won the Clark Medal in 1969 and 1971,
statistical techniques of measurement, for which Heckman and McFadden have
been awarded the prize, may seem esoteric to a non-specialist.
Yet, they are an indispensable part of the tool-kit of an empirical
economist. The two
economists have concentrated their talents on studying the behavior of
micro units such as individual, households and firms, using large micro
data sets. The common thread
running through their work is the use of microeconomic theory to develop
econometric techniques that allow researchers to measure the effect of one
or more variables on individual behavior when data sets may be biased in
certain respects or are missing information on some of the relevant
consider a researcher who wants to quantify the effect of education on
wages and collects data on the wages received by workers and the years of
education received. Assume,
however, that there is a threshold level of wage below which workers do
not accept employment. Then,
among the workers with low levels of education, those offered low wages
will not accept employment. Since
data collection is limited to the workers who are employed, these workers
will not be represented in the sample.
differently, among the less educated, only those workers lucky enough to
be offered high-wage jobs will be represented in the sample.
This “selection bias” will lead the researcher to underestimate
the effect of education on wages: both less educated workers and the more
educated ones would appear to receive high wages.
microeconomic theory, Heckman devised a statistical technique in the
mid-seventies, called the Heckman correction, which allows the
investigator to correct for this bias.
Selection-bias problems are endemic to applied microeconomic
problems, which make Heckman’s original technique and its subsequent
refinements by himself and others indispensable to applied
tackled similar problems but with a major difference: he devised methods
for estimating relationships when choices are discrete.
Thus, the traditional microeconomic theory is confined to the
problems that involve continuous choices: how much of a good to consume or
how much of a good to produce. But
many choices are discrete. For
example, individuals may be faced with the problem of choosing among a
limited number of modes of transportation: car, bus and subway.
Their choices may depend on the travel time and cost associated
with each mode and individual characteristics such as age, sex, income and
a researcher has the information on only a subset of the relevant
characteristics. The issue
then is how best to predict the individual’s choice.
McFadden developed the so-called conditional logit model in
1974 that enables the researcher to accomplish this task.
The model and its refinements have been routinely applied in
studies of urban travel demand.
Professor Orley Ashenfelter of Princeton University, where Heckman received his Ph.D., has an interesting story to tell about the new Nobel Laureate. The late Albert Rees, one of Heckman's teachers at Princeton, once remarked that Heckman’s was the best graduate class in labor economics he had ever taught or ever would teach. “When Al was asked how he could know that it was the best class ever, he explained, with a twinkle in his eye,” recalls Ashenfelter, “that Heckman was the only student in the class in that year!”
Economic Times, October 18 2000.