Knowledge Transfer
Knowledge Transfer recognises the two-way flow and uptake of ideas between the University of Melbourne and the broader community. As the role of universities changes, we must develop strong bilateral relationships with government, business and the community - and become increasingly visible, relevant and accessible to society’s changing needs.
Recent examples of Knowledge Transfer in the Department of Economics include
- Homo Economicus and the Financial Crisis
- Assessing the Impact of Improved Sanitation on Child Health
- Asian Development Bank PNG Aid Program
Homo Economicus and the Financial Crisis
In January 2009, Dr. Nikos Nikiforakis was interviewed about the causes of
the recent financial crisis by the ABC TV show Catalyst. The aim of the programme
was to present scientific evidence suggesting that bubbles in asset markets
are - at least partly - due to individual irrationality. For the purposes of
the programme, Dr. Nikiforakis conducted an experiment showing how
bubbles might form in a controlled experiment in the Economics Department's
Experimental Laboratory and how these bubbles suggest that individual rationality
is a problematic assumption in economics.
A bit of background
The recent financial crisis, the largest since the Great Depression in the 1930s, has sparked a heated debate about the causes of the crisis. A number of people -including the Australian prime minister in a recent article in Monthly magazine - have openly attacked the belief in the efficiency of unregulated markets. This belief shared by many (but not all) economists is based on the efficient market theory which postulates that if individuals have rational expectations asset prices in the market should reflect all publicly available information about the asset. Therefore, any deviations of an asset’s price from its ‘true’ value will be temporary. In other words, bubbles should not occur if most people are rational.
So what caused the recent bubbles? Where they due to individual irrationality? While the answer might seem straightforward to many, it is fair to say that the topic is controversial amongst economists. Economic theory assumes the existence of Homo Economicus – an omniscient being. Recent evidence from laboratory experiments suggests that individuals are irrational – in a predictable way. However, at any given point in time, it is difficult to judge whether prices are deviating from their true value due to irrational behavior; what is the true value? As Alan Greenspan, Chairman of the Federal Reserve Bank, famously said in 1994 “How do we know when irrational exuberance has unduly escalated asset values…?”
Using laboratory experiments to study bubble formation
One way to understand bubble formation and its causes is to conduct laboratory experiments. Individuals participating in these experiments can trade shares or put their money in a bank account which pays a safe interest. The laboratory environment allows researchers to control the distribution of dividends and the traders’ knowledge of it. Therefore using the rational expectations model we can actually estimate the ‘true’ price for a given share. If we observe systematic deviations from this price then we have evidence that the majority of traders do not have rational expectations.
In the experiment conducted for Catalyst bubbles did form. Prices rose steadily and peaked at 3 times the real value of the asset. The unavoidable crash came shortly afterwards. The formation of bubbles in laboratory experiments raises serious concerns about the predictive power of the efficient market theory and the rationality of individuals. One policy implication is that regulators should process information in a way that assists individuals to make better decisions (e.g. what is the price/earnings ratio of the asset). Another implication is that regulators should prevent some individuals from exploiting others (e.g. by imposing restrictions on leverage). For economic theory, the time seems right for homo economicus, the omniscient being, to evolve. The task should be to understand the way in which we are irrational.
(A good starting point for the interested reader is: Smith, V.L., Suchanek, G.L. and A. Williams. 1988. “Bubbles, Crashes and Endogenous Expectations in Experimental Spot Asset Markets,” Econometrica 56, 1119-1151.)
Assessing the Impact of Improved Sanitation on Child Health
Assoc. Prof. Lisa Cameron and Dr Manisha Shah are leading an evaluation of a large scale community-led sanitation program in Indonesia. This evaluation forms part of a global effort by the Water and Sanitation Project (WSP) of the World Bank to evaluate the impact of improved sanitation on child health. Evaluations of similar programs are being conducted in Vietnam, Peru, Senegal, Tanzania, India and Indonesia. The goal is to determine the most cost-effective way of reducing diarrheal disease and death amongst young children.
The Approach
The program being assessed in Indonesia is called “Total Sanitation and Sanitation Marketing” (TSSM). In the past sanitation projects focused on building toilets and physical infrastructure for communities. This approach has not been very successful and often results in inappropriate and underutilized facilities. The TSSM approach demands community involvement. It does not provide infrastructure but involves sending “facilitators” to villages to instigate a discussion of the negative consequences of poor sanitation. Community members are then asked to pledge to help the community become “Open Defecation Free (ODF)”. The community must forge their own plan for making this happen with only limited follow-up support and monitoring from the program. ODF communities receive recognition and commendation from local and provincial governments. Anecdotal evidence suggests that where the program has already been implemented, it has been well-received and a number of communities have attained ODF status.
Randomized Evaluation
The Impact Evaluation Team will randomly select 100 treatment villages that will receive the full TSSM program and 100 comparison villages that will not receive the program. The evaluation will then compare, for example, the change in diarrhea prevalence in the treatment and comparison communities. It is important to randomize because this is the only way to accurately measure the expected overall impact of the program. If, for example, the program was only conducted in villages where the program was most likely to be successful, then although we might find a large decrease in diarrhea in those villages compared to villages that weren’t in the program, this would tell us little about how much diarrhea might decrease when the program is implemented in other villages.
Assoc. Prof Cameron and Dr Shah’s role is to design the randomization plan, communicate this (with assistance from Melbourne University PhD student Ririn Purnamasari) to the country implementation team and local government officials and oversee its implementation. They will then oversee the implementation of a large, longitudinal household survey. This survey will collect data on a broad range of health indicators, including the collection of blood and faecal samples. The survey will be conducted both pre- and post- intervention.
The Indonesian program is being piloted in East Java. Strong health impacts will be an important tool for generating the support needed to obtain funding for an expansion of the program across the country. The ultimate aim of the program and evaluation is to help developing countries attain their Millennium Development Goals for sanitation.
Asian Development Bank PNG Aid Program
Dr Rhonda Smith
Over the summer of 2007-08, Dr Rhonda Smith (Economics) spent two months working in Papua New Guinea (PNG) on an aid program sponsored by the Asian Development Bank (ADB). PNG is resource rich: it has abundant mineral deposits, gas and petroleum, as well as a climate that allows the production of fruit and vegetables ranging from tropical to temperate. However, it has significant law and order problems and poor infrastructure, especially for transport and communications. A key issue for development is to increase the transparency and accountability of public and private administration.
ADB believes that an important microeconomic reform necessary for development is a more effective competition policy. PNG established a competition watchdog, the Independent Consumer and Competition Commission, in 2002. However, whilst the Commission’s staff consisted almost exclusively of economists, a key difficulty was identifying and applying the appropriate economic concepts and theory within a legal environment. Consequently, the aid program involved Dr Smith delivering a large number of training sessions. These were conducted on an interactive basis, and Dr Smith focused on issues that the staff had considered, or were considering, or that had been raised in the newspapers or by government. The objective of these sessions was both to train existing staff and to lay the foundations for ongoing training by senior staff using the materials provided.
The other main objective of the program was to assist in compiling staff manuals for complaints handling, and for authorization and clearance. Together with staff, Dr Smith spent a considerable amount of time and effort developing these manuals which contain explanations of relevant sections of the ICCC Act and provided pro-forma lists of the inquiries that must be made for each section of the Act in assessing alleged breaches. The process of compiling these manuals provided valuable training for existing staff, and will also make it easier for newly appointed staff to understand these processes.