Three Americans Earn Nobel Economics Prize

Leonid Hurwicz of the University of Minnesota, Eric Maskin of Princeton and Roger Myerson of the University of Chicago share the prize. They were honored for laying the foundation of mechanism design theory.

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STEVE INSKEEP, Host:

Three Americans will share this year's Nobel Prize for Economics. The winners named today are Leonid Hurwicz of the University of Minnesota, Roger Myerson of the University of Chicago, and Eric Maskin of the Institute for Advanced Study in Princeton, New Jersey. They were cited for work trying to explain situations in which markets work, and situations in which they don't. NPR's Jim Zarroli is covering this story. Jim, good morning.

JIM ZARROLI: Good morning.

INSKEEP: So they came up with something called Mechanism Design Theory. What in the world is that?

ZARROLI: Well, this is a complex branch of economics that, as you say, basically helps determine when markets work. What is the most efficient way to get them to work? When do you need outside institutions like government, or like some kind of alternative trading system to make them work better? It was really pioneered by Leonid Hurwicz back in 1960. And, by the way, according to the Nobel committee, Hurwicz is 90 years old, and he is now the oldest Nobel Prize winner ever. Maskin and Myerson basically played key roles in advancing the work that he had begun. Mechanism Design today plays sort of an important role in economics and in political science. Myerson said this morning that he was surprised to win because so many of the people who are familiar with his work are dying off.

INSKEEP: Yeah.

ZARROLI: He is, by the way, the 80th Nobel Prize winner in economics from the University of Chicago.

INSKEEP: Well, I want to try to get my brain around this concept if I can. You're saying that, well, for example, you've got financial markets. And they're pretty free to trade and buy and sell in ways that they want, but the government also picks moments to step in. The Securities and Exchange Commission imposes a lot of regulations. Are you saying these guys tried to figure out when that kind of government intervention makes sense and when it doesn't?

ZARROLI: That is part of what they studied. As you remember, Adam Smith's invisible hand analogy basically says that under ideal conditions, the markets always ensure the most efficient allocation of resources...

INSKEEP: All of us together are wiser than any one of us would be at once. That's what you're - that's what they're...

ZARROLI: Exactly. That's the theory. But in the real world, conditions aren't always perfect. You may have a - for instance, in a company or a firm, you may have somebody who acts in a way that is beneficial to that person, but not to the institution as a whole. Or, you know, what is much more common, people may not have complete information about a product or a resource that they want to acquire. So there are lots of ways that the markets may not work efficiently, and that is what these three men studied.

INSKEEP: How in the world can an economist get his brain around the idea, then, of human nature?

ZARROLI: Well, that is what Mechanism Design is about. It tries to find a way to quantify these situations. It basically enables you to find a mechanism that allows trade to function more efficiently. How do you design an auction, for instance, that is most likely to facilitate trade? The outcome of an auction can vary tremendously, depending on how it's designed. When do you need government regulation to step in? These are difficult questions because of the way organizations work, and Mechanism Design helps you find a more precise way of addressing some of these questions.

INSKEEP: Okay, Jim. Thanks very much.

ZARROLI: You're welcome.

INSKEEP: That's NPR's Jim Zarroli, reporting on a Nobel Prize for Economics. It goes to three Americans for work that may very well affect how much money we're making right now, even though it may not always be easy for us to understand how.

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U.S. Trio Honored with Nobel for Economics

A Fuller Explanation

Read what the Royal Swedish Academy of Sciences has to say about the work it honored:

For the Non-Economists

Still don't understand what these Nobel winners developed? Here's an explanation for non-economists from the "Marginal Revolution" blog.

Americans Leonid Hurwicz, Eric S. Maskin and Roger B. Myerson were awarded the Nobel Memorial Prize in Economic Sciences on Monday for developing a theory that helps explain situations in which markets work and others in which they don't.

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

"Mechanism design theory, initiated by Leonid Hurwicz and further developed by Eric Maskin and Roger Myerson, has greatly enhanced our understanding of optimal allocation mechanisms," the academy said, "accounting for individuals' incentives and private information."

Their theory lets economists, governments and businesses "distinguish situations in which markets work well from those in which they do not," the academy said in its citation.

"It is a huge honor, I'm just overwhelmed to have my name on that list," Myerson told Sweden's TV4 network.

Hurwicz, 90, who was born in Moscow, is a professor of economics at the University of Minnesota in Minneapolis. Maskin, 56, is professor at the Institute for Advanced Study at Princeton, N.J.; and Myerson, 56, is a professor at the University of Chicago in Illinois.

The academy said their research helps explain mechanisms and decision-making procedures involved in economic transactions, for example, what insurance polices will provide the best coverage without inviting misuse.

The economics award is not one of the original Nobel Prizes. It was created in 1968 by the Swedish central bank in Nobel's memory.

Last year American Edmund S. Phelps won the prize for explaining the relationship between inflation and unemployment, work that has had a profound impact on macroeconomic policy.

Nobel Prize winners receive a $1.5 million prize, a gold medal and a diploma from the Swedish king.

From Associated Press reports.

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