American economist and recipient of the 2001 Nobel Prize. oseph Stiglitz is an As a New Keynesian economist, Stiglitz’ research has contributed to the understanding of how microeconomic phenomena can provide a foundation for macroeconomics. Stiglitz’ research includes groundbreaking work on information asymmetry in many different applications, monopolistic competition, and risk aversion.
More About Joseph Stiglitz
- For a long time, the assumption underlying much of mainstream economics was that the invisible hand worked its magic seamlessly. Prices moved smoothly up as demand outpaces supply and rushed back down when the tables were turned, keeping markets in equilibrium.
- Many observers realized the truth was actually quite different – that prices, and wages and interest rates in particular, were often sticky, and that this sometimes prevented markets from clearing.
- Joseph Stiglitz proved why some prices were naturally sticky, thereby creating market inefficiencies and thwarting the functioning of the invisible hand. In Stiglitz’s words, the invisible hand “is invisible at least in part because it is not there.”
- Stiglitz’s work emphasizes the risk of basing policies on the assumption that interest rates rise and fall smoothly. Instead of relying on rules of thumb about when to raise or lower rates, creative, analytical thinking is needed.
- Further, Stiglitz was awarded the Nobel Prize in the Economic Sciences for his work on the theory of information asymmetry, including the use of screening by insurance companies to sort customers by type in order to manage risk.
- His work explores various ways in which imperfections in information shared between market participants can lead markets to fail to reach efficient, competitive outcomes.
- Stiglitz also helped to create the theory of monopolistic competition, which tries to account for competitive markets where firms and products can be differentiated from one another.
- In monopolistic competition, things like advertising, branding, and product differentiation can contribute to barriers to entry for new firms, which violates the assumptions of perfect competition and can prevent the market from achieving an economically efficient outcome.