Americans Win Nobel Prize in Economics
Three American researchers won the Nobel Prize in economics for theoretical work into ways to make interactions between buyers and sellers with private information more efficient. Their research has influenced the design of auctions for everything from Treasury bonds to items on eBay.The Royal Swedish Academy of Sciences awarded the Nobel Memorial Prize in Economic Science to Leonid Hurwicz, 90 years old, a retired professor at the University of Minnesota, who told reporters he thought his chances at the honor had faded; Eric S. Maskin, 56, of the Institute for Advanced Study in Princeton, N.J.; and Roger B. Myerson, 56, of the University of Chicago.
"Today's award is for deep conceptual theory. It's not highly practical in itself, but it builds the foundation for so much," said Al Roth, a Harvard University economist who has built on the trio's work to construct systems that allocate donated kidneys among those who need transplants and match medical students to residency programs.
Regarded as the father of the field known as "mechanism design theory," Mr. Hurwicz tackled a problem that the field of economics didn't traditionally consider: When markets don't allocate resources efficiently, or at all, what sort of allocation mechanisms can be created that will do so?
In textbooks, Adam Smith's invisible hand matches buyers with sellers equally. A million potato farmers will find a million potato eaters and will sell their goods for the maximum that buyers are willing to pay. In the real world, buyers and sellers can't find each other, or one buyer tries to corner the market, or the government grows the potatoes. Mechanism design theory addresses what happens when buyers and sellers keep private information about how they value a good or service.
Mr. Hurwicz, born in Moscow, began developing theories that show when markets aren't capable of operating efficiently -- and to measure what type of mechanism would work best. "Leo Hurwicz made the breakthrough that the key part of the problem is that people don't have incentives to share information" about the price at which they are willing to buy or sell, said Mr. Myerson, who studied Mr. Hurwicz's work as a Harvard graduate student.
Messrs. Myerson and Maskin built on Mr. Hurwicz's work by finding a way to mathematically represent certain types of allocation mechanisms. That allows economists to easily compare different models for selling goods. "It becomes a graduate-student-level problem," said Mr. Myerson.
Mechanism design theory is critical to building and to successfully bidding in auctions. In the 1990s, the Federal Communications Commission hired two Stanford University experts in the field to consult on revamping its method of auctioning off radio spectrum. "You wouldn't really say that the material has helped with the design of these things, but it's helped in the way of thinking through the issues," said Paul Klemperer, an economist at the University of Oxford who advised the British government on its sale of third-generation wireless spectrum.
Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, said mechanism design theory offers insight into what happened in financial markets this summer. It "takes very seriously the informational constraints that people operate under," he said. The way that investors responded during the crisis suggests that a shortage of information was a bigger problem for the market than a lack of liquidity. That conclusion is "consistent with the lack of use we've seen in the discount window," the Fed's program for lending directly to banks.
"I supported the discount-rate reduction, and I think it was the right thing to do," Mr. Lacker said. However, "if liquidity was the problem, we would have seen more use of the discount window."
"Mechanism design formalizes ways of thinking about how a social planner, manager or parent can set up rules so that all parties involved have the incentives to act in the way that the planner/manager/parent prefers," economist and author Steven Levitt said on his Freakonomics blog.
The three winners will share $1.5 million.
"Today's award is for deep conceptual theory. It's not highly practical in itself, but it builds the foundation for so much," said Al Roth, a Harvard University economist who has built on the trio's work to construct systems that allocate donated kidneys among those who need transplants and match medical students to residency programs.
Regarded as the father of the field known as "mechanism design theory," Mr. Hurwicz tackled a problem that the field of economics didn't traditionally consider: When markets don't allocate resources efficiently, or at all, what sort of allocation mechanisms can be created that will do so?
In textbooks, Adam Smith's invisible hand matches buyers with sellers equally. A million potato farmers will find a million potato eaters and will sell their goods for the maximum that buyers are willing to pay. In the real world, buyers and sellers can't find each other, or one buyer tries to corner the market, or the government grows the potatoes. Mechanism design theory addresses what happens when buyers and sellers keep private information about how they value a good or service.
Mr. Hurwicz, born in Moscow, began developing theories that show when markets aren't capable of operating efficiently -- and to measure what type of mechanism would work best. "Leo Hurwicz made the breakthrough that the key part of the problem is that people don't have incentives to share information" about the price at which they are willing to buy or sell, said Mr. Myerson, who studied Mr. Hurwicz's work as a Harvard graduate student.
Messrs. Myerson and Maskin built on Mr. Hurwicz's work by finding a way to mathematically represent certain types of allocation mechanisms. That allows economists to easily compare different models for selling goods. "It becomes a graduate-student-level problem," said Mr. Myerson.
Mechanism design theory is critical to building and to successfully bidding in auctions. In the 1990s, the Federal Communications Commission hired two Stanford University experts in the field to consult on revamping its method of auctioning off radio spectrum. "You wouldn't really say that the material has helped with the design of these things, but it's helped in the way of thinking through the issues," said Paul Klemperer, an economist at the University of Oxford who advised the British government on its sale of third-generation wireless spectrum.
Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, said mechanism design theory offers insight into what happened in financial markets this summer. It "takes very seriously the informational constraints that people operate under," he said. The way that investors responded during the crisis suggests that a shortage of information was a bigger problem for the market than a lack of liquidity. That conclusion is "consistent with the lack of use we've seen in the discount window," the Fed's program for lending directly to banks.
"I supported the discount-rate reduction, and I think it was the right thing to do," Mr. Lacker said. However, "if liquidity was the problem, we would have seen more use of the discount window."
"Mechanism design formalizes ways of thinking about how a social planner, manager or parent can set up rules so that all parties involved have the incentives to act in the way that the planner/manager/parent prefers," economist and author Steven Levitt said on his Freakonomics blog.
The three winners will share $1.5 million.
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