The 2020 Sveriges Riksbank Prize in Economic Sciences has been awarded to Paul R. Milgrom and Robert B. Wilson “for improvements to auction theory and inventions of new auction formats.”
- About the contributions
- What is auction theory?
- How do these contributions matter?
- About economics Nobel prize
About the contributions:
- Paul R. Milgrom and Robert B. Wilson are economists at Stanford University, USA.
- They formulated a more general theory of auctions that not only allows common values, but also private values that vary from bidder to bidder.
- They clarified how auctions work and why bidders behave in a certain way.
- They used their theoretical discoveries to invent entirely new auction formats for the sale of goods and services.
- Paul Milgrom by analysing bidding strategies in different auction forms came up with a more general theory of auctions.
- Robert Wilson’s work showed why rational bidders tend to bid under their own estimate of the worth due to worries over the “winner’s curse” (The winner’s curse is a tendency for the winning bid in an auction to exceed the intrinsic value or true worth of an item).
What is Auction theory?
- Auction theory studies how auctions are designed, what rules govern them, how bidders behave and what outcomes are achieved.
- The outcome of an auction (or procurement) depends on three factors-
Auction’s rules or format – closed or open bids, single bids versus multiple bids.
Auctioned object – how does each bidder value an item.
Uncertainty – regarding which bidder has what information about the object that is getting auctioned.
- Different auction models are needed for depending upon the commodities, purpose of the auction and the entities conducting the auction.
- The design of an auction has a tremendous impact not just on the buyers and the sellers but also on the broader society.
- Using auction theory, it is possible to explain how these three factors govern the bidders’ strategic behaviour and thus the auction’s outcome.
- The theory can also show how to design an auction to create as much value as possible.
How do these contributions matter?
- The contributions have helped governments and private companies design their auctions better.
- It has helped in the better allocation of scarce resources and offered more incentives for sellers to produce complex goods.
- It has been helping companies and governments design auctions, thus adding to other innovative auction formats adopted by sellers trying to maximise revenues.
- It has helped in auctioning goods and services which are difficult to sell in traditional ways. E.g.radio frequencies.
About Nobel prize in economics:
- Officially called the Sveriges Riksbank Prize in Economic Sciences.
- It is not one of the original Nobel Prizes established by Alfred Nobel’s will in 1895.
- The prize was established in 1968 by a donation from Sweden’s central bank Sveriges Riksbank to the Nobel Foundation to commemorate the bank’s 300th anniversary.
- It is administered and referred to along with the Nobel Prizes by the Nobel Foundation.
- It is awarded for Outstanding contributions in Economics or Social Sciences.
- It was first awarded in 1969 to Dutch economist Jan Tinbergen and Norwegian economist Ragnar Frisch.
- It has been awarded 52 times to 86 Laureates between 1969 and 2020.