Today, Elinor Ostrom of Indiana University and Oliver E. Williamson of the University of California, Berkeley won the Nobel prize in Economics. Dr. Ostrom won “for her analysis of economic governance, especially the commons” and Dr. Williamson “for his analysis of economic governance, especially the boundaries of the firm.”
According to the N.Y. Times:
The prize committee, in making the awards, seemed to be influenced by the credit crisis and the severe recession that in the minds of many mainstream economists has highlighted the shortcomings of a unregulated marketplace, in which “economic actors,”left to their own devices, will act in their own self-interests and in doing so, will enhance everyone’s well-being. The committee, in effect, said that theory was too simplistic and ignored the unstated relationships and behaviors that develop among companies that are competitors but find ways to resolve common problems. “Both scholars have greatly enhanced our understanding of non-market institutions” other than government, the committee said.
“Basically there is a common understanding that develops even among competitors when they are dealing with each other,” Mr. Shiller said, adding “when people make business contact, even competitors, they can’t anticipate everything, so an element of trust comes in.”
More details on the Nobel laureates, see the NobelPrize.org.
Tyler Cowen gives a nice example of Dr. Williamson’s work in practice:
“Let’s say you privatize a water system in Africa and write a 30-year contract with a private French company to run the thing. As the contract nears its end, and if renewal is not obvious, the company has an incentive to “asset strip,” or at the very least not maintain the value of the pipes. Alternatively, the government might signal, in advance, that it has every intention of renewing the contract. The company then has the incentive to lower quality to consumers, since it expects renewal a and faces weaker competitive constraints.”
Marketplace has an interview with Dr. Williamson who reveals one of the most important benefits of a Nobel prize: a free university parking space.