American duo win Nobel prize in economics for improvements to auction theory

Two American economists have won the Nobel Prize for improving the theory of how auctions work and inventing new and better formats that are now woven into the economy.

The discoveries of Paul R Milgrom and Robert B Wilson “have benefitted sellers, buyers and taxpayers around the world”, the Nobel Committee said, noting that the auction formats developed by the winners have been used to sell radio frequencies, fishing quotas and airport landing slots.

The two winners, who are economists based at Stanford University in California, were announced in Stockholm by Goran Hansson, secretary-general of the Royal Swedish Academy of Sciences, rounding off a week of Nobel Prizes.

Technically known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, the award was established in 1969 and is now widely considered one of the Nobel prizes.

The committee said Mr Wilson’s work showed “why rational bidders tend to place bids below their own best estimate of the common value,” that is, “the value which is uncertain beforehand but, in the end, is the same for everyone”.

“(Bidders) are worried about the winner’s curse – that is, about paying too much and losing out,” the committee said.

Mr Wilson, 83, described his former student, Mr Milgrom, as “sort of the genius behind all of this auction work”, noting that they first worked together on auctions in the 1970s.

“We’re really motivated to use theory in a very practical way to improve various economic processes,” Mr Wilson said.

Mr Milgrom, 72, developed a more general theory of auctions that takes into account what is known as the “private value” of what is being sold that can vary greatly from bidder to bidder.

Americans have figured prominently among this year’s Nobel winners. Leaving aside the peace prize, which went to the UN’s World Food Programme, seven of the 11 laureates have been Americans.

Mr Hansson said: “After the Second World War there’s been an enormous investment in research and higher education in the United States, and that has paid off in all the sciences. And we’ll see how that trend may change in in the future.”

Last year’s award went to two researchers from the Massachusetts Institute of Technology and a third from Harvard University, for their groundbreaking research into efforts to reduce global poverty.

Few economists could have predicted last autumn that the globe would come to a virtual standstill within months, as governments closed their borders, imposed lockdowns and ordered other measures to stop the spread of Covid-19, triggering a sharp dip in business activity worldwide.

Last week, the Nobel Committee awarded the prize for physiology and medicine for discovering the liver-ravaging hepatitis C virus. The prize for physics honoured breakthroughs in understanding the mysteries of cosmic black holes, and the chemistry prize went to scientists behind a powerful gene-editing tool.

The literature prize was awarded to American poet Louise Gluck for her “candid and uncompromising” work. The World Food Programme won the Nobel Peace Prize for its effort to combat hunger worldwide.