Nobel Prize 2020 in Economic Sciences

#GS3 #Economy

 

Nobel Prize 2020 in Economic Sciences has been awarded to Paul R Milgrom and Robert B Wilson for improvements to auction theory and inventions of new auction formats.

  • Paul Milgrom and Robert Wilson were chosen for the prestigious prize for coming up with improved auction theory and inventing new auction formats, benefiting sellers, buyers and taxpayers around the world. They invented new formats for auctioning off many interrelated objects simultaneously, for broad societal benefit rather than maximal revenue.
  • The Economic Science Laureates have not just clarified how auctions work and why bidders behave in a certain way but used their theoretical discoveries to invent entirely new auction formats for the sale of goods and services.

 

Robert Wilson

  • Wilson formulated a theory for auctions of objects with a common value. a value that is uncertain beforehand but, in the end, is the same for everyone. For example, the future value of radio frequencies or the volume of minerals in a particular area.
  • Wilson through his research showed why rational bidders tend to place bids below their own best estimate of the common value, as they are worried about the winner’s curse, which means paying too much and losing out.

 

Paul Milgrom

  • Paul Milgrom developed a general theory of auctions that not only allows common values but also private values that vary from bidder to bidder.
  • He further analysed the bidding strategies in a number of well-known auction formats, demonstrating that a format will give the seller higher expected revenue when bidders learn more about each other’s estimated values during bidding.

 

Significance

  • Over the years, societies have allocated more complex objects among users such as landing slots and radio frequencies. In 1994, the US authorities became the first ones to use auction formats to sell radio frequencies to telecom operators. Since then, many other countries have followed suit.
  • Generally in an auction, people have always sold things to the highest bidder or bought them from whoever makes the cheapest offer.
  • Nowadays, objects worth astronomical sums of money are auctioned every day and these include not only household objects, art, and antiquities but also securities, minerals, and energy. Public procurements are also conducted as auctions now.
  • Hence, researchers using the auction theory try to understand the outcomes of different rules for bidding and final prices, the auction format. 
  • However, the analysis is difficult because bidders behave strategically, based on the available information. They take into consideration what they know themselves and what they think other bidders to know.

 

Nobel Prize 2019 in Economic Science

  • The 2019 Nobel Prize in Economic Science was awarded jointly to Indian origin economist Abhijit Banerjee and his wife and colleague Esther Duflo and Michael Kreme for their research and experimental approach to alleviating global poverty. 

 

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