Michael Keane (economist)

Education and career

Keane was born in Suffern, New York, United States, and graduated from Xavier High School in Manhattan in 1979. He received a B.S. degree from the Massachusetts Institute of Technology in 1983, and a Ph.D. from Brown University in 1990.

In 1993, he became a tenured associate professor at the University of Minnesota, and was promoted to Full Professor in 1996. He subsequently held full professor positions at New York University (1998–2001) and Yale University (2000-2006).

In 2006, he moved to Australia to take up an Australian Federation Fellowship at the University of Technology Sydney. In 2011, he became an Australian Laureate Fellow at the University of New South Wales.

Keane was elected a Fellow of the Econometric Society (2005), to the Council of the Econometric Society (2009), and a Fellow of the Academy of Social Sciences in Australia (2012). He was the recipient of the John D.C. Little award for the Best Paper in Marketing (1996) and the Kenneth J. Arrow Award for Best Paper in Health Economics (2008). In 2004–05, Keane was the Goldwater Chair of American Institutions at Arizona State University and, subsequently, has been a regular visiting professor there.

Contributions

Keane's work is notable for the fact that it spans a very wide range of substantive and methodological areas. He is best known for work on the following topics:

Discrete choice models

Keane's work on recursive importance sampling (the "GHK" algorithm), contained in his thesis (1990) and published in 1993–1994, made it feasible to estimate a much larger class of discrete choice models than was previously possible. In particular, his thesis developed a fast algorithm for the highly accurate calculation of areas of polyhedrons in very-high-dimensional spaces. While primarily a result in applied mathematics, this result is very useful in economics (and other social sciences) because the choice probabilities in discrete choice models generally have this form. The GHK algorithm is now included in many popular econometrics software packages, including SAS, Stata, GAUSSX, Matlab and R-Cran-Bayesm, and is a standard topic in graduate econometrics texts.

Consumer demand and marketing

A 1996 paper with Tulin Erdem in Marketing Science presented what is now the main economic model of advertising and consumer learning. This paper received the John D.C. Little Award for the Best Paper in Marketing in 1996, and it has had a major impact on the fields of marketing and industrial organization. There is now a large literature on consumer learning based on the Erdem-Keane framework. Erdem and Keane (among others) have argued that their framework can provide an economic explanation for the phenomenon known as brand equity, based on incomplete information and risk aversion. The November 2013 issue of Marketing Science contains an extensive review of the large literature based on the Erdem-Keane framework.

Dynamic life-cycle models

In a series of joint papers with Kenneth Wolpin, published between 1994 and 2010, Keane developed a major line of research on dynamic life-cycle models of career (i.e., school and work) choices. This line of research is notable both for the methodological contributions on how to estimate these types of models, and for its substantive economic contributions. Methodologically, their method of approximating the solution to computationally intensive dynamic programming problems led to a great expansion in the class of such models that are feasible to implement empirically (i.e., their method made it possible to estimate models with many more choices and state variables than was possible previously). Substantively, their seminal 1997 paper on "The Career Decisions on Young Men" presented the so-called "90 percent result"—i.e., that most of what matters for lifetime earnings has already happened by age 16. This result helped to shift the focus of the human capital literature away from college education and towards early childhood education. This is now a very active area of research in economics, which has been pursued by both Keane and Wolpin and, quite notably, by the Nobel Prize–winning economist James Heckman, among others.

Welfare and transfer programs

His 1998 paper with Robert Moffitt, entitled "Multiple welfare program participation and labor supply," has had great influence on subsequent models of transfer/welfare programs. This was the first paper to account for the very complex budget constraints created when people may participate in several government welfare programs simultaneously. The model predicted that welfare caseloads would drop substantially in response to earnings subsidies (like the Earned Income Tax Credit).

Human capital and labor supply

In recent years, Keane has argued persuasively that, due to human capital effects, labor supply elasticities are much larger than the previous consensus of the economics profession would suggest. These views are presented in Imai and Keane (2004), Keane (2010) and Keane and Rogerson (2012). If correct, his views imply that welfare losses from income taxation are much higher than was previously thought. Recently, Keane gave a keynote lecture summarizing this work at the 2015 annual meeting of the Royal Economic Society. His Cowles lecture at the 2011 summer meeting of the Econometric Society also dealt with this topic.

Modelling expectations

Keane's papers with David Runkle (1990, 1998) are considered fundamental contributions in the literature on how people form expectations. These papers showed that the widespread empirical failure of "rational expectations" was in fact due to a set of econometric and data problems (such as the failure to account for aggregate economic shocks and the effects of data revisions).

Panel data econometrics

The recursive importance sampling algorithm developed in Keane's 1994 Econometrica paper made it possible to estimate panel data discrete choice models with complex serial correlation patterns. This approach is now widely used to model discrete dynamic processes in marketing and labor economics. Keane's 1992 Journal of Business and Economic Statistics paper with David Runkle developed a new approach for estimating linear panel data models in cases where the available instruments are predetermined but not strictly exogenous. This is a very common case that includes all dynamic panel data models as a leading example. Chamberlain (1982) noted that the Keane-Runkle approach was not fully efficient because it fails to use all available instruments. Keane and Runkle (1992) responded that the use of additional instruments would be unwise as it would generate bias due to the "many instrument problem." Nevertheless, the development of more efficient panel data estimators based on more instruments became a major research program in the 90s. Examples of this line of research are well-known papers by Arellano-Bond (1991), Ahn-Schmidt (1995), Arellano-Bover (1995) and Blundell-Bond (1998). For a review of the literature see Baltagi (2005) chapter 8. More recent work, such as Ziliak (1997), supports Keane and Runkle (1992)'s original argument that use of additional instruments may cause severe bias.

Econometric methodology

Keane is well known as a champion of the "structural econometrics" school, which emphasizes the important role of economic theory in empirical work. This contrasts with the "experimental school" which has become very popular in the last 20 years. The latter seeks to use "natural experiments" to substitute for economic theory. He has written a number of articles on the importance of theory and the limitations of experiments (see Keane 2010a, 2010b).

Other areas

In addition, Keane has done significant work in many other areas, such as health economics, child development, international trade, political economy, experimental economics, and development economics.

Notable students

Tulin Erdem (Ph.D. 1993), who is the Leonard Stern Professor of Business at New York University, was editor-in-chief of the Journal of Marketing Research, one of the core journals in marketing, from 2009–2012. She was also the president of the Institute for Operations Research and the Management Sciences (INFORMS) Marketing Society (ISMS) from 2006–2007. Dan Houser (Ph.D. 1998) is the Director of the Interdisciplinary Center for Economic Science and the Chair of the Department of Economics at George Mason University. Raquel Bernal (Ph.D. 2003) is the Director of the Center for the Study of Economic Development (CEDE) at the Universidad de los Andes in Bogotá, Colombia, and the 2013 recipient of the Juan Luis Londoño Prize for an economist under 40 whose research has contributed significantly to the well-being of Colombians. Keane has advised several other students who have also made significant contributions in various areas of economics and business, including Susumu Imai (labor supply, Bayesian methods), Andrew Ching (Marketing, Empirical IO), Susan Feinberg (trade), Katherine Harris (health) and Ahmed Khwaja (Marketing, Empirical IO, health).

Selected papers