Three American economists were awarded the 2001 Nobel Memorial Prize in Economic Science on Wednesday for their pioneering research in the shortcomings and imperfections of market systems.
The winners were Joseph E. Stiglitz, a professor at Columbia University; George A. Akerlof of the University of California at Berkeley; and A. Michael Spence from Stanford University.
Their findings explain, among other things, why consumers view warranties as signals of product quality; why insurance companies vary premiums and offer deductibles; why a used-car sells even though it is a lemon. The theories they developed incorporated "imperfect information" into economics -- a concept at odds with the mainstream view that markets are all-knowing and self-correcting. That is still the emphasis in many Econ 101 textbooks.
"The three of them really pioneered the view that markets, when confronted with imperfections, may not be the best way to allocate resources," said Alan Krueger, a Princeton University economist. "That changed economics."
Long before they won, Stiglitz, 58, and Akerlof, 61, were often mentioned as likely Nobel winners, for work that germinated when they were graduate students together, obtaining their PhDs in economics at the Massachusetts Institute of Technology in the late 1960s.
When the call came Wednesday morning from the Nobel committee in Stockholm, Stiglitz said he was getting a cup of coffee in his New York apartment. "We switched from coffee to champagne," he said.
Akerlof was asleep in Berkeley. "My first thought was that Joe had won," he said, "and someone was calling to get my reaction."
Spence, 58, an emeritus professor at Stanford who retired two years ago to become a partner in a venture capital firm, was asleep at his vacation condominium in Hawaii. "I was stunned," he said.
The Nobel committee, in an award citation calling Stiglitz's work the broadest of the three, said: "Joseph Stiglitz's many contributions have transformed the way economists think about the working of markets. Together with the fundamental contributions by George Akerlof and Michael Spence, they make up the core of the modern economics of information."
The economists' research, done mostly in the 1960s and 1970s, persuaded all three that government must play a strong role in a market system, to prevent damage from imperfect information. At a news conference at Columbia on Wednesday, Stiglitz, the best known of the three, reiterated that view.
Financial markets, he said in offering one example, run on information, and without the Securities and Exchange Commission to enforce full disclosure, people would find themselves purchasing corporate stock without sufficient knowledge to determine a proper value. Management -- and perhaps others selling the stock -- might know of serious shortcomings that were hidden from buyers. If that "asymmetry" happened often enough, stock trading could break down.
"One part of the market knows more than another," Stiglitz said, "and in a sense imperfect or asymmetric information is at the heart of our work."
Just as imperfect information justifies government intervention, so does it explain various corporate strategies.
Insurance companies, for example, have difficulty distinguishing between the homeowner whose dwelling is a fire hazard and the homeowner less likely to have fire damage. Charging the same high rate to both for substantial coverage would draw more high-risk customers, while low-risk households would be more likely to risk going without insurance. With too many high-risk customers, claims would mount and the insurance company could go broke.
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