I have recently been thinking about how to get more students interested in research. I think many of the brightest students nowadays choose to go to the private sector. We [Indians] have a great under-representation in many academic fields relative to other high-skilled occupations such as medicine, engineering, and business.

In my case, I realised that my long-term objectives lined up better with a PhD than other paths. At a young age my dream was to discover something that would have a great impact on the world and help a lot of people. I think I was very aware of issues such as poverty and lack of growth partly because of my background, having grown up both in India and in the US. I remember, quite vividly, going to the Taj Mahal when I was eight. It was immaculate and beautiful inside. But outside, you see extreme poverty in Agra. Experiences like that sparked my interest in understanding how to improve the economy.

I was fortunate to have grown up in an environment where I was well aware of what doing a PhD entailed and what being an academic means.

My father made many theoretical contributions in economics and was very involved in government policy in India in regard to deregulation in the 1980s. I saw through his work that one could have great impact by doing something that ultimately has some policy application, but at the same was rigorous and scientific. And I saw through my parents that the academic life could, at a personal level, be very satisfying and enriching.

My concern is that many bright students who would be leading scientists and researchers choose other careers because of misinformation. In talking with non-academic friends, particularly those in the Indian community, I think there are two misconceptions that need to be corrected. First, one does a PhD not so much to teach but to do research that will have a big impact. Many people view professors as skilled teachers - which is one important aspect of the job - but fail to realise that many of the fundamental discoveries in society that make our quality of life better today than in 1900 are made by academics. So I think that the social value of pursuing a PhD may be underappreciated. Second, academia has the reputation of being a very tough life, particularly financially. But I think the monetary rewards of academia are also often misperceived. This is especially true at top universities for quantitative fields, where salaries compare quite favorably with many specialties in medicine or law. Some people ask, "Why are economists and scientists paid so much to sit and think?" I think of the answer one of my colleagues at Berkeley gives: 'If Milton Friedman's research helped us avoid another Great Depression, then he's paid the bill for all the economists in this generation.' Now of course not every person is going to do what Milton Friedman did... but if one out of every ten thousand does, it's worth paying researchers a lot. One of my objectives in the longer run is to try to attract more bright students to top PhD programs. For example, there's an enormous pool of talent at the IITs in India that I think could be very successful. I'd like to think about ways to encourage some of that group to apply to PhD programs in the US.

How do you get ideas for your research, which often depart from the way economists traditionally think?

I get a lot of my ideas talking to people casually, not economists per se; not sitting at my desk, but observing the day-to-day world - my family, my friends.

I had the idea for my dissertation when I was at my sister Malathy's house in Chicago for the Christmas break. I had been thinking about the problem of unemployment, and why economic theories tended to suggest that unemployment is not very costly to individuals. I began thinking about how my sister's family would react to an income shock such as job loss. What struck me when talking with my sister about their situation is that they - like other high-income professional families - had a lot of fixed "commitments" - expenses that they would not be able to adjust very easily in the short run if they were to suffer an income loss. For example, they were paying off an expensive home mortgage, paying for schooling expenses for three children, paying for cars, etc. Losing any income would be difficult for them despite their high level of income to begin with, because these fixed payments left very little disposable income for items such as food.

I realised that this logic was missing from the canonical theory of risk in economics, "expected utility theory," which effectively assumes that people can adjust consumption of all goods costlessly when they lose income. This assumption was the key reason that economists were under-estimating the costs of unemployment and other income shocks. Over the next three months, I worked out the mathematics to formalise this idea and looked at data to assess its importance in practice. The idea led to job offers from the top universities a few months thereafter.

My undergraduate thesis at Harvard (written when I was 19), concerned the effect of interest rates on business investment. I got the idea again outside the office, when I was on a tour of a large Chrysler automobile plant by a friend of our family's. Most standard economic models of investment assume that you can increase or decrease the level of investment easily. It occurred to me that there was no way for Chrysler to do this: they could not downsize the plant easily to make fewer cars given the amount of fixed irreversible investment that had already been done. There was work in economics on 'irreversible investment' by Avinash Dixit and others that I read upon returning home.

I started thinking about whether irreversibility would have any implications for what happens when the government changes policies (eg taxes, interest rates). I discovered that it did. The surprising finding was that increasing the interest rate could increase investment by encouraging companies not to delay these irreversible investments. A simple example of the logic is in the introduction to my paper 'Interest Rates, Irreversibility, and Backward-Bending Investment,' later published in the Review of Economic Studies.

Image: An man begs in front of the Taj Mahal. A visit to the Taj at the age of eight, when he saw extreme poverty at close quarters, sparked an interest in Chetty to understand how economy works.

Photograph: Tauseef Mustafa/AFP/Getty Images