Nobel Prize in Economic Sciences

• 13 Oct 2020

Why in News

The Royal Swedish Academy of Sciences awarded Sveriges Riksbank Prize in Economic Sciences, 2020 to Paul Milgrom and Robert Wilson (both from the USA) for their work on commercial auctions.

Key Points

• About:
  
  • Sveriges Riksbank Prize in Economic Sciences, 2020 is given in memory of Alfred Nobel and is popularly (but incorrectly) known as Nobel Prize for Economics.
    
    • As it is not one of the five Nobel prizes that Alfred Nobel established in his will in 1895, it is not a Nobel Prize.
  • It was created in 1968 by a donation from Sweden's central bank Sveriges Riksbank to the Nobel Foundation to commemorate the bank's 300^th anniversary and includes a 10 million Swedish kronor award money — roughly Rs 8.33 crore.
    
    • It is officially titled the "Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel”.
• The 2020 Edition:
  
  • Milgrom and Wilson improved the auction theory and invented new auction formats for auctioning off many interrelated objects simultaneously, on behalf of a seller motivated by broad societal benefit rather than maximal revenue.
  • Their work will benefit sellers, buyers and taxpayers around the world. It will help in auctioning goods and services, such as radio frequencies, which are difficult to sell in traditional ways.
  • Wilson developed the theory for auctions of objects with a common value — a value which is uncertain beforehand but, in the end, is the same for everyone. Examples include the future value of radio frequencies or the volume of minerals in a particular area.
  • 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.
  • Milgrom came up with a more general theory of auctions, by analysing bidding strategies in different auction forms.
• Auction Theory
  
  • Auction theory studies how auctions are designed, what rules govern them, how bidders behave and what outcomes are achieved.
  • The oldest form of auction is the auction of a bankrupt person’s property to pay off his creditors. This simple design of such an auction is the highest open bidder getting the property (or the commodity in question).
  • Over time, the format of auctions has widened to include other commodities such as spectrum for radio or telecom use, carbon dioxide emission credits, electricity or the right to collect the local garbage etc.
  • Different auction models are needed for depending upon the commodities, purpose of the auction and the entities conducting the auction.
    
    • For e.g. Maximizing the profit may be the motive of a private auction while making a service affordable can be the purpose of auctioning a service by the government. Wrong auction design can lead to a second-hand market where companies trade among themselves with little revenue accruing to the government or little benefit to the public.
  • How an auction is designed, has a tremendous impact not just on the buyers and the sellers but also on the broader society.
  • Three key variables need to be understood while designing an auction.
    
    • Rules of Auction i.e. closed/sealed bids, single bids versus multiple bids.
    • Commodity or service being put up for auction i.e. how does each bidder value an item.
    • Uncertainty regarding which bidder has what information about the object, or even the value another bidder associates with the object.

Source: TH