The 2007 Alfred Nobel Memorial Prize in Economics will be shared by three Americans, Leonid Hurwicz, Eric Maskin and Roger Myerson. From Stockholm, Kevin Billinghurst reports for VOA.
The three are honored for their contributions to the field known as mechanism design theory.
We encounter decisions in our daily lives that touch on the allocation mechanisms studied by Hurwicz, Maskin and Myerson. In most economic transactions, one or both parties possess private information not known to the other, for instance when a car salesman knows exactly how much an auto costs from the factory, and the customer does not.
Joint projects between companies can fall apart, even when there is a clear gain to both sides, simply because each partner feels the other is not shouldering a fair share. Insurance companies may exaggerate the costs of providing health care in order to increase premiums, and well-covered policy holders may claim non-existent illness in order to get a few days of paid vacation.
Adam Smith's metaphor of an "invisible hand of capitalism" guiding decisions is useful in describing how markets, under ideal conditions, ensure efficient allocation of scarce resources. The three new Nobel laureates make the point that, in practice, conditions are seldom ideal: competition may not be completely free, consumers may be imperfectly informed, and rational individual choices may generate unforeseen social or environmental costs.
Mechanism design theory was first outlined by Leonid Hurwicz of the University of Minnesota in the 1960s, and refined and applied by Eric Maskin of Harvard and Roger Myerson of the University of Chicago.
By no means do the three reject the power of market efficiency; instead, they have worked to show which trading mechanisms, regulation schemes and voting procedures are best suited to real-world conditions, especially in the provision of public goods.
Professor Tore Ellingsen, a member of the prize-awarding Royal Swedish Academy of Sciences, explained:
"One very rich area of application is regulation theory, where we now see that regulation theory is being re-written on the basis of this work, and to some extent implemented," he said. "In countries like the UK, we see mechanism design theory being applied, not only for setting up the trading mechanisms for the de-regulated industries, but also to regulate the remaining monopolists. So, we are seeing traces in the real world of institutions being reshaped by these ideas."
The economics award was not included in the will left by Alfred Nobel upon his death in 1897, but was funded in 1968 by the National Bank of Sweden. Like the Nobel laureates in medicine, chemistry, physics and literature, the recipients of the Alfred Nobel Memorial Prize in Economics will come to Stockholm in December to receive their gold medallions and checks for about $1.4 million. The Nobel Peace Prize in awarded in Oslo, Norway.