Nobel in Economics Goes to 3 Scholars Who Devised Tools for Allocating Scarce Goods

By DAVID GLENN

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This year's Nobel Memorial Prize in Economic Science will be awarded to three scholars who have developed tools for analyzing and designing auctions, voting systems, and other institutions for allocating scarce goods.

The winners, announced on Monday morning by the Royal Swedish Academy of Sciences, are Leonid Hurwicz, a professor emeritus of economics at the University of Minnesota-Twin Cities; Eric S. Maskin, a professor of social science at the Institute for Advanced Study, in Princeton, N.J.; and Roger B. Myerson, a professor of economics at the University of Chicago.

The basic problem that the three scholars have explored is how best to deal with the problem of "private information." Classical models of market exchange assume, among other things, that all economic actors have perfect information about one another's preferences. But there are many real-world situations in which people have incentives to lie, or at least to withhold information, about their true wishes. In many types of auction, for example, buyers' opening bids are much lower than the maximum price they are actually willing to pay. And buyers and sellers of health insurance often have incentives to deceive one another in various ways.

How to Allocate 'Public Goods'

Beginning in the early 1960s, Mr. Hurwicz began to use game theory to create mathematical models of auctions and other market-like institutions where the players have incomplete information about each other's preferences. In general, Mr. Hurwicz argued that such institutions can and do operate efficiently; his 1960s papers gave a new level of formal precision to Friedrich A. Hayek's mid-20th-century argument that markets, rather than state planning, are the best way to aggregate information about individuals' private preferences.

But Mr. Hurwicz also recognized that, in some cases, institutions appear to behave inefficiently. In particular, he has worked on the problem of optimal mechanisms for allocating "public goods," such as highways or clean water. In such cases, private information is a serious challenge. As Paul Samuelson put it in a famous 1954 paper, "It is in the selfish interest of each person to give false signals, to pretend to have less interest in a given collective activity than he really has."

Mr. Hurwicz developed a number of conceptual tools for creating formal models of economic institutions. Mr. Maskin and Mr. Myerson, who are a generation younger, expanded on Mr. Hurwicz's insights in a series of major papers in the 1970s.

Influence on Auctions

One crucial step forward was the development of the "revelation principle," which was laid out in separate papers in 1979 by Mr. Maskin and Mr. Myerson. (Mr. Maskin's paper was written with Partha Dasgupta and Peter J. Hammond.) The revelation principle is, in essence, a mathematical proof that says that for any imaginable economic mechanism that reaches equilibrium, there is an equivalent mechanism in which the players truthfully report their preferences.

The revelation principle allows researchers to focus on a narrow subclass of institutional designs, said Vincent Conitzer, an assistant professor of computer science and economics at Duke University, in an interview on Monday. "Otherwise," he said, "it would be simply impossible to get mathematical traction on these problems because the possibilities would be so vast."

The Nobelists' insights have had a significant influence on the design of auctions, especially in the arena of environmental policy, where auctions for the right to emit carbon dioxide and other contaminants have become a tool to restrain polluters. Scholars have also recently proposed applying such insights to civil-justice reform, the matching of medical students with internships, and the matching of kidney donors and recipients.

Paul Klemperer, a professor of economics at the University of Oxford, in England, said in an interview on Monday that the three scholars' work had made it possible to do much-more-sophisticated modeling of economic institutions than had been possible 40 years ago. Mr. Klemperer and Mr. Maskin collaborated on the design of an auction of carbon-emission permits that was used by the British government in 2002.

The key virtue of the scholars' work, Mr. Klemperer said, is "the rather precise modeling of cases where you have a number of actors who have different information, and you have to think about how to take account of their private information and give them incentives to behave in such a way that you have an efficient outcome."

Oldest Nobel Winner Ever

Mr. Hurwicz was born in Moscow in 1917. At the age of 90, he is the oldest Nobel winner in history. Mr. Maskin, who was born in 1950, taught at Harvard University for 15 years before moving to the Institute for Advanced Study in 2000. (He lives in Princeton in the former home of Albert Einstein, who won the Nobel Prize in Physics 86 years ago.) Mr. Myerson, who was born in 1951, taught at Northwestern University for 19 years before moving to the University of Chicago in 2001.

Mr. Myerson has also done work on game-theoretic approaches to war and international relations, in the tradition of the pioneering game theorist Thomas C. Schelling, who won the Nobel prize two years ago. Just yesterday, Mr. Myerson posted a working paper about trust, reputation building, and the prospects for democratic governance in Iraq.

The three scholars will share an award of approximately $1.5-million, to be presented in Stockholm on December 10.

The prize, which is formally known as the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, is not one of the five awards the Swedish inventor devised in his will in 1895. The economics prize was established in his honor in 1968 by the Bank of Sweden.