Associated Press
Three Americans won the Nobel prize for economics on Wednesday for developing ways to measure the power of information in a wide range of deals and investments, from used car sales to the recent boom and bust of high-tech stocks.
The award extends U.S. dominance of the prestigious Nobel awards, with eight Americans winning prizes so far this year, one more than in 2000.
George Akerlof of the University of California at Berkeley, Michael Spence of Stanford University and Joseph Stiglitz of Columbia University will share the economics prize, which is worth $943,000 this year.
Their theory on "asymmetric information" was lauded for giving experts an important tool for gauging how players with differing amounts of information influence financial markets and everyday transactions.
Though developed nearly three decades ago, the contributions continue to have a wide-ranging impact and "form the core of modern information economics," the Royal Swedish Academy of Sciences said.
The researchers, for example, gave economists a way to measure the risks faced by a lender who lacked information about a borrower’s creditworthiness.
Their research also explored how people with inside knowledge of a technology company’s financial prospects gain an edge over other investors, while people who don’t fully understand a company’s finances may invest unwisely.
The theory helps economists explain why the recent bubble in high-technology stocks burst.
"The big question in economics is when do markets work and when do markets fail. These three economists moved that analysis into a new realm," said Gregory Mankiw, an economics professor at Harvard University.
The Royal Swedish Academy of Sciences cited a watershed 1970 paper by Akerlof called "The Market for Lemons," which showed that a lack of information explains why markets such as used cars are charged with uncertainty and often filled with unhappy customers.
In the used car market, Akerlof said, buyers are suspicious because they are afraid of ending up with a lemon, and sellers are worried about getting a good price.
"Markets such as for used cars tend to be rather screwed up," Akerlof said Wednesday.
Spence was cited for coming up with ways to measure "signaling," when people and businesses go out of their way to boost their images.
For example, individuals earning a graduate degree get more than an education — they send a signal to prospective employers that they work hard. A company that pays dividends on its stocks sends a signal that it is doing well.
"All of us were given the award for trying to understand how markets perform when people have imperfect information," Spence, 58, said.
Stiglitz measured how poorly informed parties can boost their business by extracting information from better informed ones.
A car insurance company, for instance, can glean information about whether customers are high-risk or low-risk by the size of deductibles and premiums they choose.
The literature prize will be announced today and the peace prize on Friday.
On the Net: www.nobel.se
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