Adventuring into the unknown, that is what it is all about. It was April 16, the day when thinking of courses was over and a new period was about to start: writing my own thesis. I had no clear idea of what I was going to write about, but I already knew that in around two months I was going to be on the stage presenting and defending my research in front of three critical committee members. Luckily, I had already completed a step; I had an advisor.
What at first seemed to be a potential peril ended up being the greatest advantage: I was free to work on whatever topic I desired. There was only one condition, I had to work, and work hard. Although I had not yet made any concrete progress, working hard for the thesis was something that had already started more than a month before, and included reading papers during the exam week. I was flying around different topics that were not necessarily related to my advisor’s field. During the course of the year I had taken note of some “crazy” ideas that came to my mind, but there was something that was definitely bothering me. In almost all the models that we covered, especially in macroeconomics, there was the common assumption that an agent takes as given the decisions of other agents and does not take into account the impacts of decisions on aggregate variables. What happens if an agent realises that she has the power to influence aggregate variables? What if in this way she could induce a response from other agents? I was eager to dig into this matter.
I decided to take the model of Aiyagari (1994) “Uninsured Idiosyncratic Risk and Aggregate Saving”, initially developed to get more insights into inequality and introduce strategic interaction among agents, taking into account the impact of their decisions of savings into the interest rate. If one would like to think about a parallel to the real world, it would be as if big economies or governments consider the change they would generate in the international interest rate due to their debt emission. This was my adventure into the unknown, I was applying dynamic oligopoly theory to an incomplete markets model, and I barely had any literature to rely on.
Another issue was that I was dealing with equilibrium concepts that were unknown to me and learning the techniques to program and simulate the model was a big challenge. I consider that doing the thesis was like taking two or three advanced courses simultaneously, where I was the professor and the student. Fortunately, during this challenging period my advisor was keeping me on track, clarifying my idea, and pointing me to the right literature. Creating something new is much more difficult than it seems, and having the right person to discuss it with becomes fundamental to progress. In the end, the results were not so promising, but all the knowledge I gathered along the way, both about economics and my own preferences, is invaluable. It was a lot of work that I really enjoyed doing and I consider myself lucky for having a great advisor, Christian Hellwig, who I want to acknowledge for giving me his support