On Monday, Paul Milgrom and Robert Wilson heard that they won the 2020 Nobel Economics Prize. Usually, the prize winner gets a call late at night with the good news. However, Dr. Milgrom did not answer his phone.
This is how he found out:
Starting with Dr. Milgrom’s late night doorbell, we could say that although economics has been called The Dismal Science, its Nobel facts are quite interesting.
The First Economics Prize
Alfred Nobel never endowed a Nobel Prize in economics. More than 70 years after the original Nobels were created, Sweden’s Central Bank commemorated its 300th anniversary with a fund that established The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Although it is managed just like the other Nobel Prizes, the money instead comes from the Bank. In 1969, Jan Tinbergen and Ragnar Frish were the first recipients.
The 2020 Economics Prize
Paul Milgrom and Robert Wilson received the 2020 Sveriges Riksbank Prize in Economic Sciences “for improvements to auction theory and inventions of new auction formats.” Simplifying, we can just say that they were really good at auction design.
When most of us think of an auction, we imagine buyers and sellers. Competing against each other, the buyers try to pay less. At the same time, sellers hope for more. In the end, the auction matches a buyer and a seller with a single price that both accept and everyone is happy.
We have seen many things go wrong in auctions. During the early months of the pandemic, U.S. states were bidding against each other for ventilators and face masks. Those auctions did not wind up with the optimal prices or allocation. The results were undesirable because no one established appropriate rules. More than 30 years ago, problems also developed with bandwidth auctions when the U.S. government let “bidders” try to convince officials why they should be selected. Flawed, that “beauty contest” system was replaced by a lottery that again functioned inefficiently.
This is where Drs. Milgrom and Wilson enter the picture. Their auction design successfully allocated the frequencies and raised the most cash. Geography had to be a consideration since a company could want one area and not another, It might need two frequencies in different locations that complemented each other. In addition, they needed to maximize the size of the bids.
Drs. Milgrom and Wilson recognized that an auction can have bidders start high or low. It can involve items (like a $33 million dinosaur at Christie’s) for which the bidders each determine a private value. But also, the auction could be for something with a common value like logging rights. The two economists who received this year’s Nobel Economics Prize rationalized the countless permutations that auctions involved. They were honored for their theories and their practical designs.
Extra Prize Perks
In addition to sharing 10 million Swedish kronor, Nobel Laureates have received some extra perks.
The 1922 Nobel prize winner, Niels Bohr was offered a lifetime residence from the makers of Carlsberg beer. The home reputedly had a pipeline directly to the brewery from which he got an unlimited supply of beer.
A Parking Space
If you teach at Duke and win a Nobel Prize, you get a parking space. The school decided that anyone who is honored by so auspicious an award deserves a spot right outside his or her office. Similarly, Brown, USC, and Northwestern offer the same perk,
The sign at USC:
Our Bottom Line: Scarcity
When we slice away all of its complexities, economics is really about scarcity. To an economist, scarcity means limited quantities. So, when you see a supermarket shelf stocked with hundreds of bottles of water, you are looking at scarcity. Domino’s (reputedly) 34 million different pizza permutations are examples of scarcity.
Because the quantities of most goods and services are limited, all of us, at the same time, cannot have as much as we might want of everything. As a result, societies have to decide what to produce and who gets what. Auctions are one way to achieve distribution.
Through their investigation of auctions, Paul Milgrom and Robert Wilson helped us figure out how best to manage scarcity.
My sources and more: The Nobel Prize website was a good starting place to learn more about the new Economics Laureates. From there, the NY Times and “The Undercover Economist,” Tim Harford, were helpful. Meanwhile, WSJ had the quirky Prize perks.
My description of the Nobel Economics Prize history and of the parking space perk were in a previous econlife post.