Becker Friedman Institute
for Research in Economics
The University of Chicago

Research. Insights. Impact. Advancing the Legacy of Chicago Economics.

Price Theory Fellow Spotlight: Will Rafey, Massachusetts Institute of Technology

Will Rafey is a PhD candidate in economics at the Massachusetts Institute of Technology in Cambridge. His research foci include market design and structural industrial organization. He is particularly interested in environmental applications, including climate change and resource management. His research is supported by MIT’s Environmental Solutions Initiative.

Prior to enrolling at MIT, Rafey earned his bachelor’s degree in social studies from Harvard College in 2013 and a master’s degree in pure mathematics from Cambridge University in 2014.

How did you decide to focus on your economics research on environmental issues?

I thought: this is the model of how I want to think about this problem—this is what I want to do. So I decided I needed to do more economics.

I grew up in the Bay Area, in Santa Clara, and I was very seriously involved in debate in high school, which was an amazing thing that I still value a great deal. The topic my senior year was climate change, which got me into climate policy—it just seemed so outrageous to me that there could be an objectively obvious threat to humanity and that we were doing so little about it here in the US.

We never lost a debate that climate change was happening, that the science was real, that it was anthropogenic, that it was the most serious threat to humanity—and we made it to the final round of the national tournament. In that kind of community, with such tremendous strategic incentives to beat the arguments other people were reading, it was an instructive experience for me to be convinced that this issue was in some senses indisputable.

When I got to Harvard as an undergrad, I took a lot of different social science classes, initially interpretative: anthropology, law, history, and the history of science. It was only in my second year that I took one economics class, in the spirit of “knowing what the enemy was up to”—in these policy debates in climate change you’d see results from economic models cited all the time, and I found those sort of black boxes very frustrating. But during intermediate micro, when we got to public goods, I thought: this is the coolest way to understand the problem of pollution and climate change.

I got really excited about that approach, and then in the spring of my sophomore year, I took a beautiful class taught by a professor at Harvard named Marty Weitzman. Weitzman was the exact opposite of how I had been trained to receive economists: his humility, clarity of mind, and honesty about every single limitation of cost-benefit analysis—combined with some splendid dynamic optimal control theory—left a deep impression on me. I thought: this is the model of how I want to think about this problem—this is what I want to do. So I decided I needed to do more economics.

Describe your current research ideas on CO2 taxes and on water markets.

My background is in mathematics, and I like working on applied theory problems, where you set up a classical economic model—in my case, usually optimal taxation or regulation—and ask how far you can get just by working on a chalkboard. And then you can take things to data afterwards. But there’s no econometric content at first. Those projects are a bit harder to talk about.

The project I’m working on this fall at Chicago is actually an applied project: I’m studying water trading in Australia, which has the world’s largest market for water. Water management is increasingly challenging, with supplies shrinking due to rising demand and impending climate change. Using the Australian system as a real-world model for managing shared natural resources, we are able to ask some classic optimal regulation questions. Does the market behave the way we expect as economists? Are there ways that we can design the market to promote particular behaviors?

In the Australian Murray-Darling Basin, regional water managers allocate water for users every two weeks. Natural questions emerge when future rainfall, weather, and technology are uncertain. In particular, calculating the future value of water becomes very important—any water you use today is water you can’t use tomorrow, and in a drought that starts to bind. What excites me about Australia is that we see a lot of choices that you can’t see in many other places. In several other environmental mechanisms, prices are zero or near zero—which means we can’t study how prices affect behavior, or how behavior affects prices.  

If we observe trading behavior and other production-side data, we can make inferences about demand and explicitly calculate the value of water. We can then determine whether the value of water implicit in the decisions made by regulators and farmers matches the price at which people are trading. How do those disparities, if they exist, change over time, across space and between seasons? What does that imply about optimal water management? What happens when some states restrict or create barriers to trade?

Ultimately, I hope these and related questions will help us to measure, empirically, the efficiency and social value of this type of government-created market—and maybe eventually also provide a means for comparing similar market-based approaches in other regions of the world.

You are one of three Price Theory Fellows visiting the University of Chicago this semester. What were your expectations coming into the fellowship? What are you hoping to gain from this experience?

I’m excited to spend time listening to Kevin Murphy talk about price theory. One of the first papers that I remember being blown away by in college, and still one of my favorites, is a price theory paper he wrote with Gary Becker in which they rationalize addiction and drug abuse, and derive some beautiful and nonobvious lessons for optimal policy that takes the intelligence of drug addicts seriously. More recently, he also wrote a climate change economics paper with Gary Becker and Robert Topel that takes a clean approach based in price theory; it will be nice to think about the world from this perspective. I also hope my time here will be a good change of pace that will bring some clarity and focus to my research.

Will Rafey is one of three 2016 Price Theory Fellows attending UChicago this semester. The award, supported by the Searle Freedom Trust, is intended to introduce PhD students from economics programs around the country to the Chicago price theory tradition. 

—Tina Cormier