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Tuesday, Oct 16, 2007
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Three Americans win Economics Nobel

For laying foundations of mechanism design theory

AFP

Leonid Hurwicz, Eric S. Maskin and Roger B. Myerson who won the Nobel Memorial Prize in Economic Sciences.

STOCKHOLM: Americans Leonid Hurwicz, Eric S. Maskin and Roger B. Myerson won the Nobel Economics prize on Monday for developing a theory that helps explain situations in which markets work and others in which they don’t.

Mr. Hurwicz (90) is the oldest Nobel winner ever, according to the academy. “I really didn’t expect it,” said the Moscow-born researcher, an economics professor at the University of Minnesota in Minneapolis.

The three winners “laid the foundations of mechanism design theory,” which plays a central role in contemporary economics and political science, said the Royal Swedish Academy of Sciences.

The theory helps explain how incentives and private information affect the functioning of markets, for example, what insurance polices will provide the best coverage without inviting misuse.

It also helps explain how sellers and buyers can maximise their gain from a transaction.

Mechanism design theory was initiated in 1960 by Mr. Hurwicz and further developed by Mr. Maskin and Mr. Myerson in the 1970s, said the academy. Essentially, the three men studied how game theory could help determine the best, most efficient method for allocating resources given the available information, including the incentives of those involved.

Mr. Hurwicz said he was surprised to have won the award. “There were times when other people said I was on the short list, but as time passed and nothing happened I didn’t expect the recognition would come because people who were familiar with my work were slowly dying off,” he said.

Mr. Maskin (56) is professor at the Institute for Advanced Study at Princeton, New Jersey; and Mr. Myerson (56) is a professor at the University of Chicago in Illinois.

Mr. Maskin said he was relieved Mr. Hurwicz was among the winners.

The trio share the 10 million Swedish kronor ($1.5 million) prize for a theory that helps economists, governments and businesses “distinguish situations in which markets work well from those in which they do not,” the academy said.

The theory has been used in everything from negotiations over labour issues to the auctioning of government bonds and has helped countries and companies better understand how markets function even when conditions are rocky.

Mr. Myerson said he had been inspired by the work of his fellow laureates.

“There were a lot of us working in this area in the late 1970s,” he told The Associated Press, categorising his work as investigating “How does information get used in society to allocate resources.”

The trio’s work is used to help companies, even countries, understand the alternatives to traditional markets.

“There are applications to almost all areas,” Per Krusell, a member of the Nobel Committee for Economics at the academy, told Sweden’s TV4. “One interesting case right now is that more is sold over the Internet and we don’t really know how that market works. This method can actually be used and many of the economists that are involved in trying to understand how the Internet market works use this type of analysis.”

Much like game theory, mechanism design is applied to situations where perfect markets cannot be found, such as a political give-and-take between different interest groups or even within companies themselves.

The trio’s work showed how to reach a desired outcome, such as improvements in social welfare or fatter profits. — AP

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