Edward Lazear

Ed Lazear has just been nominated to be Bush's new CEA head.  Lazear deserves a lengthy, link-rich post, but sadly from northern Mexico he is not going to get it.  Here is a home page.  Here is a speech praising Ed.  Here are his most cited pieces on the web.  A few points of mine:

1. He has pioneered the theory of tournaments with Sherwin Rosen.  The key point is that you should compensate people for their performance relative to their peers (rather than for their absolute performance) only under specialized conditions.  Most importantly, there should be general shocks to labor productivity or your ability to measure labor productivity.  In other words, if you are not sure how good your exam is, or how well you taught the class, grade your students on a curve.  This will help some of your mistakes wash out.  I think of this as his best-known piece, although there is much competition.

2. He has a seminal piece on why law firms are organized as partnerships, and on other "up or out" schemes, including tenure.  Such contracts are sometimes more incentive-compatible.  A firm will always want to cut your wages, if it can get away with it.  But with "up or out," they only want to get rid of you if in fact you stink.  This can lead to greater harmony on both sides of the relationship; you also might invest more specialized human capital in the value of the firm.  Lazear has applied similar insights to issues of mandatory retirement.  Here is an interview with Ed on personnel management.

3. He has argued that piece-rate incentives may boost productivity significantly.

4. His recent work tries to establish the conditions under which The Peter Principle will hold.  He is a famous economist, capable of earning huge sums by consulting, but he has not "cashed in" intellectually.  In his late fifties, he remains at the top of his profession.

5. He headed Bush's recent tax panel, which produced a remarkably well-reasoned and non-partisan document.  He appears to have rejected supply-side ideas that cuts in income tax rates are self-financing and he has not caught the obsession over a flat tax.

6. He has studied culture and language.  He believes that diverse immigration is better than concentrated immigration from a few locales.  He is quite capable of incorporating behavioral assumptions into economics and moving beyond the simple rational man model.  Nonetheless he sees considerable scope for economic reasoning; here is his piece on economic imperialism.

7. He has argued that unemployment insurance should become more like a loan program.

8. Lazear defends high executive salaries as a means of stimulating competition for the top jobs.  This is an offshoot of his work on tournaments.

9. Here is a summary of his work on how class size affects the quality of education.

10. Here is his recent piece on the efficacy of educational testing, a matter of interest to the Bush Administration.  The bottom line is somewhat complex, read it.

11. Here is his piece on when retail stores dominate auctions.  This is a favorite for those of us who like micro puzzles.

12. A long time ago he wrote this piece on social security and pensions.  Too bad I can't open it on this old Mexican Adobe Reader.  Maybe a reader can offer its bottom line in the comments section.

The bottom line: Lazear is a superb economist.  I do not know him, but I often hear him spoken of with a more general respect, and not just for his intellect.  The key question is who will be listening... stay tuned, and comments are open in case you have additional remarks on this appointment...