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October 10, 2001
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Akerlof, Spence, Stiglitz bag Nobel Economics Prize

George Akerlof, Michael Spence and Joseph Stiglitz, all from the United States, won the 2001 Nobel Prize for Economics, the Royal Swedish Academy of Sciences said on Wednesday.

They shared the prestigious $1-million prize for laying the foundation for modern information economics by working out what happens when some in a market place know more than others, the academy said in its citation.

George Akerlof demonstrated how a market where sellers have more information than buyers about product quality can contract into an adverse selection of low-quality products.

He also pointed out that informational problems are commonplace and important. Akerlof's pioneering contribution thus showed how asymmetric information of borrowers and lenders may explain skyrocketing borrowing rates on local Third World markets; but it also dealt with the difficulties for the elderly to find individual medical insurance and with labour-market discrimination of minorities.

Michael Spence identified an important form of adjustment by individual market participants, where the better informed take costly actions in an attempt to improve on their market outcome by credibly transmitting information to the poorly informed.

He showed when such signaling will actually work. While his own research emphasised education as a productivity signal in job markets, subsequent research has suggested many other applications, e.g., how firms may use dividends to signal their profitability to agents in the stock market.

Joseph Stiglitz clarified the opposite type of market adjustment, where poorly informed agents extract information from the better informed, such as the screening performed by insurance companies dividing customers into risk classes by offering a menu of contracts where higher deductibles can be exchanged for significantly lower premiums.

In a number of contributions about different markets, Stiglitz has shown that asymmetric information can provide the key to understanding many observed market phenomena, including unemployment and credit rationing.

George A Akerlof, 61, has a PhD from MIT and has held professorships at Indian Statistical Institute and London School of Economics. He is Goldman Professor of Economics at the University of California at Berkeley.

A Michael Spence, 58, has a PhD from Harvard and has held professorships at Harvard and the Graduate School of Business, Stanford and has also been Dean at both these universities.

Stiglitz, 58, a PhD from MIT has held professorships at Yale, Princeton, Oxford and Stanford, and has been the Chief Economist of the World Bank. He is Professor of Economics, Business and International Affairs at Columbia University.
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