Under chief economist Pat Bajari, Amazon has hired more than 150 PhD economists in five years. Bajari has also cornered the market on what might be called “rookie economists” just out of school. That crowns Amazon the largest employer of tech economists—with more of them working full-time than even the largest academic economics department. Amazon is far from alone in this trend.
Some 50 tech companies “have been snapping up economists at a remarkable scale,” says Michael Luca, the Lee J. Styslinger III Associate Professor of Business Administration at Harvard Business School. “All of the big Bay Area tech companies have teams of economists, and lots of the smaller companies are starting to hire handfuls of them.” The list includes Google, Microsoft, Airbnb, Uber, Facebook, and numerous smaller companies.
Tech companies are turning to sharp economic minds to provide their unique lens on business problems like advertising auctions and market design. The accelerating phenomenon has given rise to a new field within economics called the economics of digitization. Research from the field is quickly finding its way into practice, directly through the work of PhD economists, and in the classroom, as HBS and other business schools add more tech-germane courses to their MBA offerings.
Luca and co-author Susan Athey, the economics of technology professor at Stanford Graduate School of Business and a pioneering tech economist herself, delve into the phenomenon in their paper, Economists (and Economics) in Tech Companies, forthcoming in the Journal of Economic Perspectives.
“Inside tech firms there’s a huge competition for talent right now,” Athey says. “There are fairly junior PhDs making in the high six figures or even seven figures because their expertise is just so valuable.”
What does a digitization/tech economist do every day? Problems they work on include:
Online advertising design. Advertising inventory on search engines is often sold via auction. Economists help companies design those auctions, advising on everything from the type of auction to where to set reserve prices. “Tech firms have also hired economists to solve challenges relating to the choice of outcome of advertising, such as pay-per-click versus alternatives,” the paper states.
The role of ranking and incentives in marketplaces. The way marketplaces and intermediaries rank offers from sellers or service-providers can be thought of as an incentive system. Economists are well positioned to analyze issues such as short-term user behavior and the equilibrium impact on the marketplace as a whole.
Estimating advertising returns. Digital advertising provides marketers with renewed opportunity to measure advertising effectiveness. Economists draw on both existing theories of advertising and the tools of econometrics to test and evaluate advertising effectiveness.
Designing review and reputation systems. Platforms like Yelp and TripAdvisor contain hundreds of millions of consumer reviews; online marketplaces also rely on reputation systems to facilitate trust between strangers. Economists help companies design reputation systems, “focusing on understanding the systematic biases that can occur in review ecosystems, and the design choices that might mitigate these biases,” according to the paper.
Acquisitions, exclusive deals, and strategy. Economists draw on economic theory and empirical methods to value exclusive deals in gaming platforms; analyze whether a market can sustain a new player; and how banks should consider potential partnerships with, say, Apple Wallet.
Price setting. At Uber, a team of economists work on how to design and fine-tune its surge pricing system, which changes fares in real time and increases prices during peak hours.
Building a partnership between business and academia
According to the researchers, successful digital economists share three broad skill sets: the ability to assess and interpret empirical relationships and work with data; the ability to understand and design markets and incentives, taking into account the information environment and strategic interactions; and the ability to understand industry structure and equilibrium behavior by firms.
Working in a real-world setting with interdisciplinary teams on complex problems is part of the lure of the tech sector, says Athey, a pioneer in the field. When Athey was an economics professor at Harvard, her work caught the attention of Microsoft CEO Steve Ballmer, who sought her advice about online advertising, later offering her a position as Microsoft’s consulting chief economist, where she worked on the search advertising platform and a host of other initiatives, including the creation of an economist-staffed research lab. Twice Athey took leaves of absence from Harvard to work at Microsoft full-time.
At Microsoft, Athey says she was often the only economist on a particular problem, allowing her to share her expertise with engineers and computer scientists while learning from them. It inspired a new research agenda that she is now working on at Stanford.
Luca notes that it is not just newly minted PhD economists entering the field, ticking off names of professors, many tenured, who have left positions at Harvard, Berkeley, Columbia, NYU, and UCLA to join tech companies. The swelling ranks of tech economists dispel any uncertainty about whether it’s a tenable career path—the data suggest that there might be more economists hired in tech companies than in policy schools in recent years.
To lure an economist
As competition for talent intensifies, tech companies offer some latitude to attract top economists, which often includes the ability to continue to publish, Athey says. At Microsoft’s academic-style research lab, for example, economists are working on broader issues that aren’t necessarily Microsoft specific while using their expertise to help shape products. They are also used on teams to focus on specific business problems, which often means their research is not shared externally.
In academia, a growing set of economists are now teaching at business schools, which have been increasing their course offerings relevant to the tech sector, such as designing experiments and digital marketing. At HBS, Luca will teach a new MBA elective this spring focusing on experiments from a manager’s perspective. Twenty years ago, the idea would have been unheard of in most business schools. But in an era of increasingly data-driven decision making, MBA students will benefit from being conversant in these issues, Luca says.
The advent of digital economists is unlikely to kill collaborations between academia and tech companies. By working with academic economists, tech companies benefit by getting deep expertise on a specific topic and more generalized knowledge due to their familiarity with a large number of companies. An economist working in a tech company, on the other hand, might mainly have knowledge of his or her own firm.
As economists work on questions their companies want answered, one challenge for them is not to lose sight of societal issues that need attention. Luca, whose research focuses on user review ecosystems and online platforms, points to a study he did on Airbnb’s design choices that unintentionally led to discrimination on the platform as hosts rejected potential guests.
“When we decided to research discrimination on Airbnb, it wasn’t on a question that Airbnb was lining up to ask,” Luca says, adding that the company had denied the problem for years. “To some extent the onus is on academic and policy economists to keep asking the questions that the companies aren’t asking.”
This article originally appeared on Harvard Business School’s Working Knowledge.