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Work on Market Imperfections Wins Three Americans Nobel Prize Theory advanced by laureates in economics finds broad applications 16 October 2007   Roger B. Myerson of the University of Chicago won the 2007 Nobel prize in economics for investigating market flaws. (© AP Images)   Washington -- Three U.S. economists won the 2007 Nobel Memorial Prize in Economic Sciences for advancing a theory that helps to identify market imperfections and design mechanisms that make some market operations and social interactions more efficient. Leonid Hurwicz, Eric Maskin and Roger Myerson will share the $1.5 million prize for their work on mechanism design theory, which has found broad-ranging applications in economic policies and public life that range from auctions of government bonds and public goods to voting procedures and labor negotiations. Announcing the winners, the Royal Swedish Academy of Sciences said that the contribution of the three “allows us to distinguish situations in which markets work well from those in which they do not.” This, it added, has helped identify efficient trading mechanisms, regulation schemes and voting procedures.  The Nobel Memorial Prize in Economic Sciences, formally known as the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, was established by the Central Bank of Sweden in 1968 and was awarded for the first time in 1969. The mechanism design theory, a subset of game theory, focuses on the gap in knowledge between contractual parties, for example buyers and sellers, and the costs and consequences of their behavior. Because those parties have different levels of knowledge about the value of the transaction and their behavior is driven by opposite incentives – sellers, for example, seek the highest possible sale price and buyers the lowest -- the final outcome may not be efficient for the economy as a whole and society in general.  The general goal of the theory is to design the rules of economic transactions, political bargaining and other situations to achieve desirable, efficient outcomes.     Eric Maskin of the Institute for Advanced Study shares the Nobel prize for work on election and auction systems. (© AP Images) Myerson described his work in an interview with the Associated Press as investigating “how does information get used in society to allocate resources.” Maskin, in an interview published on the official Web site of the Nobel Foundation characterized his contribution and those of his fellow laureates as a “further step on the road to designing institutions that align individual incentives with overall social goals. He said the most “dramatic” application of the theory were auctions set up by governments around the world to sell off public assets in the hope that those assets would be put to better use in private hands. In the United States, an auction of parts of the radio spectrum has contributed to the telecommunications revolution, Maskin added. In an interview on the same Web site, Hurwicz, who laid the foundation of the theory almost 50 years ago, said he is particularly pleased about its applications for welfare economics. Hurwicz, who is 90 years old and an emeritus professor at the University of Minnesota in Minneapolis, was born in Moscow and studied in London, Geneva and Warsaw, Poland, before leaving for the United States in 1941. Maskin is a professor at the Institute for Advanced Study in Princeton, New Jersey, and Myerson is a professor at the University of Chicago. U.S. economists have won the Nobel Memorial Prize in Economic Sciences in most of the years it has been awarded. More information about the laureates can be found on the official site of the Nobel Foundation.