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Raj Chetty: Exploring how the economy works in real life

David Weinberg Apr 15, 2013
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There’s a handful of economists, maybe a dozen or two, whoare recognizable by name. Raj Chetty likely isn’t one of them. At 29, he was the youngest tenured professor in the history of the economics department at Harvard. Now, at the age of 33, he’s got a MacArthur Genius award and this past Friday he won the John Bates Clark Medal given by the American Economic Association to the best economist in the country under 40.

Chetty uses real-world experiments to challenge traditional assumptions of economics. One study he did took place at a grocery store. The goal of the experiment was to gather data about how we think about taxes.

Think of the last time you bought shampoo. Did you calculate what it would cost with sales tax?

“So the traditional assumption in economics,” says Raj Chetty, “is that you are keeping such taxes in mind when you make purchasing decisions.”

Chetty wanted to test that assumption, so he set up an experiment. He went to a large grocery store chain in California and asked if he could put special price tags on items.

“We added these tags that said $7.99 plus California sales tax equals whatever the price of the item was,” Chetty says.

The owners limited the experiment to hair care and cosmetics. They assumed the price tags would cause customers to buy less. This assumption is the opposite of what traditional economic theory tells us. It turns out the store owners were right.

“We ended up finding that demand for these products fell by 8 or 10 percent,” Chetty says. “So it was as if everybody was ignoring the tax before we put these tags on.” Chetty says.

What sets Chetty apart from many of his colleagues is that he comes up with creative ways of using data to understand how the economy works. Henry Aaron is an economist at the Brookings Institution. He says Chetty has a unique ability to look at data sets and ask the right questions.

“And when you marry those two you get results to which people pay attention and I think that’s been the case with Raj Chetty,” Aaron says.

For policy makers, Chetty’s studies of real-life economic behavior could be a very useful tool.

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