Scholars Share Nobel Prize for Theories on Business

Scholars from Columbia and Cambridge universities, whose work has shed light on how government and private enterprise can maneuver in a world of incomplete information, were awarded the 1996 Nobel Memorial Prize in economics Tuesday.

The prestigious $1.12-million award is shared by William S. Vickrey, 82, who is retired from Columbia University in New York, and James A. Mirrlees, 60, of Cambridge in Britain.

Working independently on opposite sides of the Atlantic, the economists have searched for insights that can be applied to down-to-earth problems, from setting tax rates to easing urban gridlock, while expanding the theoretical understanding of information economics.

Vickrey has come up with theories for setting subway fares, pricing electricity and conducting sealed auctions that are an efficient way to sell Treasury bonds, band-spectrum licenses and other assets. Each thinker has delved heavily into taxation and its effect on work incentives.

“What they did was path-breaking and fundamental,” said Allen Sinai, chief global economist at Primark Decision Economics in New York, about the Nobel lauzeates’ work on the economics of information. “It forms the cornerstone of micro-economic theory regarding choices by individuals and businesses.”

In the real world, he added, “everyone doesn’t know everything at the same time.”

The Royal Swedish Academy of Sciences credited the scholars with generating “a better understanding” of an array of economic issues, including taxation, insurance, credit markets and even how organizations should be designed.

Throughout their careers, Vickrey and Mirrlees have explored the problems that arise when participants in a transaction--a bank loan officer and a borrower, an auctioneer and a bidder, the government and taxpayers, an employer and job applicant--possess different amounts of information, a situation that is ripe for exploitation by one of the parties.

In economists’ lingo, this is known as “asymmetric information.”

Consider the sale of a used car. A would-be buyer does not have all the information the seller does, which gives the seller a potentially huge advantage.

Similarly, the academy said, “the owners of a firm may not have the same detailed information about costs and competitive conditions as the managing director; an insurance company cannot fully observe policyholders’ responsibility for insured property.”

The Nobel winners have provided a theoretical framework for experts to think about such situations and apply the findings in such everyday applications as drawing up contracts that protect the financial interests of both parties.

In his lengthy academic career, Vickrey, a naturalized U.S. citizen and a native of Victoria, British Columbia, has pursued practical solutions for a variety of urban problems, such as traffic congestion.

He is known among economists as the “father of congestion pricing” for his notion of charging motorists more for traveling during peak periods, a principle that also can be applied to subways, air fares and users of public utilities such as telephones and electricity.

Vickrey, who has studied urban-planning problems in India and Argentina, first attended Columbia as a graduate student in 1935.

He was a conscientious objector in World War II, when he performed alternative service designing a new inheritance tax for Puerto Rico. He has enjoyed emeritus status at Columbia since the early 1980s.

Told of his award on Tuesday, Vickrey--whose ideas gradually lost a stigma of radicalism and gained acceptance during his 60-year association with Columbia--said: “I had heard rumors that my name was there, but I figured it was less than a 50-50 chance.”

Asked what he would do with the prize money, he said, “I’ll try to make the most of the opportunity to keep spreading some of my heretical ideas.”

Mirrlees, whose telephone answering machine plays “Frere Jacques,” spent much of his academic career at Oxford, although he has taught at the Massachusetts Institute of Technology, Yale and Berkeley, and he has advised the governments of India, Swaziland and Pakistan. He got his doctoral degree at Cambridge, where he returned last year.

He was the first to develop and solve a mathematical model of an economy and the effects of income tax on it.

Colleagues said Mirrlees’ work is fundamental to economists’ modern understanding of the income tax. His model is elementary to the modern analysis of complex information and incentive problems.

“His work has been very influential and innovative. Jim is a brilliant teacher. He built up an outstanding graduate school here at Nuffield, here at Oxford,” college Dean Anthony Atkinson said.

“My subject has always been economics and human welfare,” siid the Scottish-born Mirrlees, a professor and fellow at Trinity College in Cambridge who has compared reading detective stories to mathematics. “It is a delight to have been able to contribute to that field and to have it recognized.”

Mirrlees picked up on some of Vickrey’s insights a quarter of a century after they first were made public, refining theories about the structure of an income tax.

Both of the winners are credited with providing ways to consider such hard-to-measure variables as incentive and capability in analyzing economic activity.

Times staff writer William Montalbano in London contributed to this report.

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The Winning Idea

William Vickrey and James Mirrlees won the Nobel Prize in economics for a theory that has led to a better understanding of economic activity, from insurance markets to tax systems.

IN ECONOMISTS LINGO

The pair’s theory is known as “asymmetric information.” It focuses on the dynamics of a business deal where one party knows more than the other, an advantage that can be exploited. The methodology can be applied in all kinds of contracts.

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IN THE REAL WORLD

Their theory can be applied to many business situations, including:

* Auctioning Treasury bonds

* Designing insurance contracts

* Setting optimal tax rates

* Efficiently pricing public services

Source: Times staff and wire reports