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The prize was awarded to:
EDMUND S. PHELPS.
The work of Edmund Phelps has deepened our understanding of the relation between
short-run and long-run effects of economic policy. His contributions have had a
decisive impact on economic research as well as policy. Low unemployment and low
inflation are central goals of stabilization policy. During the 1950s and 1960s
the view of a stable tradeoff between inflation and unemployment was established,
the so-called Phillips curve. According to this, the price for reduced unemployment
was a one-time increase of the inflation rate. Phelps challenged this view through
a more fundamental analysis of the determination of wages and prices, taking into
account problems of information in the economy. Individual agents have incomplete knowledge
about the actions of others and must base their decisions on expectations.
Phelps formulated the hypothesis of the expectations-augmented Phillips curve,
according to which inflation depends on both unemployment and inflation expectations.
As a consequence, the long-run rate of unemployment is not affected by inflation
but only determined by the functioning of the labor market. It follows that
stabilization policy can only dampen short-term fluctuations in unemployment.
Phelps showed how the possibilities of stabilization policy in the future depend
on today's policy decisions: low inflation today leads to expectations of low
inflation also in the future, thereby facilitating future policy making.
Another issue where intertemporal tradeoffs are of central importance concerns
the desirable rate of capital formation. By foregoing consumption for investment
in physical as well as human capital (education and research), today's generation
can raise the welfare of future generations. Phelps clarified possible distributional
conflicts among generations. He also showed that all generations may, under certain
conditions, gain from changes in the savings rate. Phelps also pioneered the analysis
of the importance of human capital for the diffusion of new technology and, hence,
for growth.
The prize was awarded jointly to:
ROBERT J. AUMANN and
THOMAS
C. SCHELLING.
Against the backdrop of the nuclear arms race in the late 1950s,
Thomas Schelling's book "The Strategy of Conflict" set forth his
vision of game theory as a unifying framework for the social sciences.
Schelling showed that a party can strengthen its position by overtly
worsening its own options, that the capability to retaliate can be more useful
than the ability to resist an attack, and that uncertain retaliation
is more credible and more efficient than certain retaliation.
These insights have proven to be of great relevance for conflict resolution
and efforts to avoid war. Schelling's work prompted new developments in game
theory and accelerated its use and application throughout the social sciences.
Notably, his analysis of strategic commitments has explained a wide range of
phenomena, from the competitive strategies of firms to the delegation of
political decision power.
In many real-world situations, cooperation may be easier to
sustain in a long-term relationship than in a single encounter.
Analyses of short-run games are, thus, often too restrictive.
Robert Aumann was the first to conduct a full-fledged formal
analysis of so-called infinitely repeated games. His research
identified exactly what outcomes can be upheld over time in long-run relations.
The theory of repeated games enhances our understanding of the
prerequisites for cooperation: Why it is more difficult when
there are many participants, when they interact infrequently,
when interaction is likely to be broken off, when the time horizon
is short or when others' actions cannot be clearly observed.
Insights into these issues help explain economic conflicts such
as price wars and trade wars, as well as why some communities are
more successful than others in managing common-pool resources.
The repeated-games approach clarifies the raison d’ętre of many
institutions, ranging from merchant guilds and organized crime
to wage negotiations and international trade agreements.
The prize was awarded jointly to:
FINN E. KYDLAND and
EDWARD C. PRESCOTT.
The Laureates showed how such effects of expectations about future economic
policy can give rise to a time consistency problem. If economic policymakers
lack the ability to commit in advance to a specific decision rule, they will
often not implement the most desirable policy later on. Kydland and Prescott's
results offered a common explanation for events that, until then, had been
interpreted as separate policy failures, e.g., that economies become trapped
in high inflation even though price stability is the stated objective of
monetary policy. Their awarded work established the foundations for an extensive
research program on the credibility and political feasibility of economic policy.
This research shifted the practical discussion of economic policy away from
isolated policy measures towards the institutions of policymaking, a shift
that has largely influenced the reforms of central banks and the design of
monetary policy in many countries over the last decade.
Research by the Laureates also transformed the theory of business cycles
by integrating it with the theory of economic growth. Whereas earlier research
had emphasized macroeconomic shocks on the demand side of the economy,
Kydland and Prescott demonstrated that shocks on the supply side may
have far-reaching effects. In their business-cycle model, realistic
fluctuations in the rate of technological development brought about a
covariation between GDP, consumption, investments and hours worked close
to that observed in actual data.
The prize was awarded jointly to:
ROBERT ENGLE and
CLIVE GRANGER. Risk evaluation
is at the core of activities on financial markets. Investors assess expected returns
of an asset against its risk. Banks and other financial institutions would like to
ensure that the value of their assets does not fall below some minimum level that
would expose the bank to insolvency. Such evaluations cannot be made without measuring
the volatility of asset returns. Robert Engle developed improved methods for carrying
out these kinds of evaluations. Clive Granger’s work has transformed the way economists
deal with time-series data. Today, tests of stationarity and cointegration are carried
out routinely as a stepping-stone to the specification of dynamic econometric models.
The prize was awarded jointly to:
DANIEL KAHNEMAN for having integrated insights from psychological research
into economic science, especially concerning human judgment and decision-making
under uncertainty,
and
VERNON L. SMITH for having established laboratory experiments as a
tool in empirical economic analysis, especially in the study of alternative
market mechanisms.
The prize was awarded jointly to:
GEORGE A. AKERLOF,
A. MICHAEL SPENCE and
JOSEPH E. STIGLITZ. Many markets are characterized by
asymmetric information: actors on one side of
the market have much better information than those on the other. Borrowers know
more than lenders about their repayment prospects, managers and boards know more
than shareholders about the firm's profitability, and prospective clients know
more than insurance companies about their accident risk. During the 1970s,
this year's Laureates laid the foundation for a general theory of markets
with asymmetric information. Applications have been abundant, ranging from
traditional agricultural markets to modern financial markets.
The Laureates' contributions form the core of modern information economics.
JAMES J. HECKMAN and
DANIEL L. McFADDEN have resolved
fundamental problems that arise in the statistical analysis of micro data.
The methods they have developed have solid foundations in economic theory,
but have evolved in close interplay with applied research on important
social problems. They are now standard tools, not only among economists
but also among other social scientists.
ROBERT A. MUNDELL, for his analysis of monetary
and fiscal policy under different exchange rate regimes and his
analysis of optimum currency areas.
AMARTYA SEN,
for his contributions to welfare economics.
ROBERT C. MERTON and
MYRON S. SCHOLES,
for a new method to determine the value of derivatives.
The prize was awarded jointly to:
JAMES A. MIRRLEES and
WILLIAM VICKREY, for
their fundamental contributions to the economic theory of incentives
under asymmetric information.
ROBERT LUCAS, for having
developed and applied the hypothesis of rational expectations, and thereby
having transformed macroeconomic analysis and deepened our understanding
of economic policy.
The prize was awarded jointly to:
JOHN C. HARSANYI,
JOHN F. NASH and
REINHARD SELTEN, for their pioneering analysis of equilibria
in the theory of non-cooperative games.
The prize was awarded jointly to:
ROBERT W. FOGEL and
DOUGLASS C. NORTH, for having renewed research
in economic history by applying economic theory and quantitative methods
in order to explain economic and institutional change.
GARY S. BECKER, for having extended the domain of
microeconomic analysis to a wide range of human behaviour and interaction,
including nonmarket behaviour.
RONALD H. COASE, for his discovery and
clarification of the significance of transaction costs and property
rights for the institutional structure and functioning of the economy.
The prize was awarded with one third each to:
HARRY M. MARKOWITZ,
MERTON H. MILLER and
WILLIAM F. SHARPE, for their pioneering work
in the theory of financial economics.
TRYGVE HAAVELMO, for
his clarification of the probability theory foundations of econometrics and
his analyses of simultaneous economic structures.
MAURICE ALLAIS for his
pioneering contributions to the theory of markets and efficient
utilization of resources.
ROBERT M. SOLOW, for his contributions to the
theory of economic growth.
JAMES M. BUCHANAN, JR., for his
development of the contractual and constitutional bases
for the theory of economic and political decision-making.
FRANCO MODIGLIANI, for
his pioneering analyses of saving and of financial markets.
RICHARD STONE, for having made fundamental
contributions to the development of systems of national accounts
and hence greatly improved the basis for empirical economic analysis.
GERARD DEBREU, for
having incorporated new analytical methods into economic theory and
for his rigorous reformulation of the theory of general equilibrium.
GEORGE J. STIGLER , for his seminal studies of
industrial structures, functioning of markets and causes and
effects of public regulation.
JAMES TOBIN, for
his analysis of financial markets and their relations to
expenditure decisions, employment, production and prices. See also
El movimiento antiglobalización y la tasa Tobin.
LAWRENCE R. KLEIN, for the creation of econometric
models and the application to the analysis of economic fluctuations
and economic policies.
The prize was divided equally between:
THEODORE W. SCHULTZ and
Sir ARTHUR LEWIS, for their pioneering research
into economic development research with particular consideration of
the problems of developing countries.
HERBERT A. SIMON, for his pioneering research
into the decision-making process within economic organizations.
The prize was divided equally between:
BERTIL OHLIN and
JAMES E. MEADE, for their pathbreaking contribution
to the theory of international trade and international capital movements.
MILTON FRIEDMAN, for
his achievements in the fields of consumption analysis, monetary
history and theory and for his demonstration of the complexity of
stabilization policy.
The prize was awarded jointly to:
LEONID V. KANTOROVICH and
TJALLING C. KOOPMANS, for their contributions to
the theory of optimum allocation of resources.
The prize was divided equally between:
GUNNAR MYRDAL and
FRIEDRICH AUGUST VON HAYEK, for their
pioneering work in the theory of money and economic
fluctuations and for their penetrating analysis of the interdependence
of economic, social and institutional phenomena.
WASSILY LEONTIEF, for
the development of the input-output method and for its application
to important economic problems.
The prize was awarded jointly to:
Sir JOHN R. HICKS, and
KENNETH J. ARROW, for their pioneering contributions
to general economic equilibrium theory and welfare theory.
SIMON KUZNETS, for
his empirically founded interpretation of economic growth which
has led to new and deepened insight into the economic and social structure
and process of development.
PAUL A. SAMUELSON, for the scientific work through
which he has developed static and dynamic economic theory and actively
contributed to raising the level of analysis in economic science.
The prize was awarded jointly to:
RAGNAR FRISCH and
JAN TINBERGEN, for
having developed and applied dynamic models for the analysis of
economic processes.
Mario Bilbao Labs
Update: October 11, 2006
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