The 2009 Sveriges Riksbank Prize for Economic Sciences is concerned with the basic question of where best to conduct transactions; in the open market, within firms, or among self-regulating groups of individuals.
Elinor Ostrom has made extensive studies of the management of common property by groups of common owners, contrasting that with management by state or private institutions. Perhaps surprisingly, she has found that those with a vested interest in the resources they manage are frequently better at regulating those resources than publicly-appointed management bodies would be. Her research reveals that in many, but not all, cases, allowing users to develop their own rules to regulate the use of common property results in the most efficient solution for managing those resources. For instance, her studies of the lobster fisheries off the coast of Maine in the United States show that self-imposed rules can often be better, and better-followed, than imposed ones. In short, self-governance can be successful. Her work incorporates both case studies of numerous real-life examples and laboratory experiments testing the ways people interact. The experiments reveal that people seem more willing to regulate others’ behaviour than predicted, and also that the development of efficient rules for regulation depends critically on good communication between the people involved.
Oliver Williamson’s work deals with understanding the limits of the firm. He has extended the theories of why certain transactions can be accomplished more efficiently within firms than they would by competition between firms or individuals. In brief, his theories predict that hierarchical organizations are better places to conduct transactions, such as the sale of coal for power plants, wherever there is either significant complexity or mutual interdependence underlying the transaction. The results of his analysis have significant implications for public policy, including the regulation of competition, since what at first sight might seem an apparently imperfect market may in fact be the most efficient way of regulating a particular set of transactions. Williamson’s theories extend previous work on the limits of the firm’s efficiency, by Ronald Coase among others, to a level at which empirical testing of predictions becomes possible.
Elinor Ostrom is the first woman to have been awarded the Prize in Economic Sciences in its forty year history.