10 October 2001
The Royal Swedish Academy of Sciences has decided to award the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, 2001, jointly to
George A. Akerlof
University of California at Berkeley, USA,
A. Michael Spence
Stanford University, USA, and
Joseph E. Stiglitz
Columbia University, USA
"for their analyses of markets with asymmetric information".
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.
George Akerlof demonstrated how a market where sellers have more information than buyers about product quality can contract into an adverse selection of low-quality products. He also pointed out that informational problems are commonplace and important. Akerlof's pioneering contribution thus showed how asymmetric information of borrowers and lenders may explain skyrocketing borrowing rates on local Third World markets; but it also dealt with the difficulties for the elderly to find individual medical insurance and with labour-market discrimination of minorities.
Michael Spence identified an important form of adjustment by individual market participants, where the better informed take costly actions in an attempt to improve on their market outcome by credibly transmitting information to the poorly informed. Spence showed when such signaling will actually work. While his own research emphasized education as a productivity signal in job markets, subsequent research has suggested many other applications, e.g., how firms may use dividends to signal their profitability to agents in the stock market.
Joseph Stiglitz clarified the opposite type of market adjustment, where poorly informed agents extract information from the better informed, such as the screening performed by insurance companies dividing customers into risk classes by offering a menu of contracts where higher deductibles can be exchanged for significantly lower premiums. In a number of contributions about different markets, Stiglitz has shown that asymmetric information can provide the key to understanding many observed market phenomena, including unemployment and credit rationing.
George A. Akerlof, 61 years, born
1940 in New Haven, Connecticut (US citizen). PhD from MIT 1966.
Has held professorships at Indian Statistical Institute and
London School of Economics. Since 1980 Goldman Professor of
Economics at the University of California at Berkeley.
A. Michael Spence, 58 years, born
1943 in Montclair, New Jersey (US citizen). PhD from Harvard
1972. Has held professorships at Harvard and the Graduate School
of Business, Stanford and has also been Dean at both these
Joseph E. Stiglitz, 58 years, born
1943 in Gary, Indiana (US citizen). PhD from MIT 1967. Has held
professorships at Yale, Princeton, Oxford and Stanford, and has
been the Chief Economist of the World Bank. Since this year,
Professor of Economics, Business and International Affairs at
The Prize amount:
SEK 10 million, will be shared equally among the Laureates
Eva Krutmeijer, phone +46 8 673 95 95, +46 709 84 66 38, email@example.com