Image credits: Niklas Elmehed for Nobel Media
When we think about the word “auctions”, we may conjure images of high society bidding for expensive paintings, or banks selling off indebted property. It seems to be a distant phenomenon that doesn’t impact our daily lives. But as it turns out, auctions play crucial roles in our lives – from deciding the price we pay for electricity in our homes, to the limit of carbon emissions allowed to different countries. In a mission to learn more about how auctions work, Paul Milgrom and Robert Wilson studied various auction formats and designed an optimal auction mechanism for governments to sell complex public assets. For this, both won this year’s Nobel Memorial Prize in Economic Sciences.
Officially the ‘Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel’, this prize has been awarded to researchers in economics from 1969 onwards, to 86 individuals so far. The ideas studied in the prize-winning contributions, and the methodology followed to reach certain conclusions, often tell us a great deal about how economics has been practiced in the respective times.
As explained by The Economist, the initial winners were often those who tried to model the economy into a few neat equations, while winners in the past two decades have tried to pick more specific topics, and conducted empirical research to back their results. In the course of the past half a century, the winners of this prize have made several contributions to help us better understand the way in which the world around us works; whether it’s auctions, the role of psychology in the making of economic decisions, alleviating global poverty, governing common resources, and so on. In this article, we have a look at some of the recent prize winners, and understand the impact their contributions have had on our everyday lives.
Milgrom and Wilson studied how different formats for auctions–specifically the bidding process, final prices, information available to bidders about the product as well as other bidders’ prior knowledge–all affect the outcomes of the auction such as the revenue generated for the seller, and the broad societal benefit. Through the theoretical study of auctions, they came to design practical auction formats that have real-world implications. In one such instance, they helped the US government auction interrelated objects simultaneously, like radio frequencies to telecom operators. Their contributions ensure that these public assets are sold in the most efficient manner possible, such that buyers (here, telecom operators) get the optimum allocation of their choice, and society’s benefits are maximised (revenue for governments that can be used to fund other public goods.) This auction format can be useful for India’s 5G spectrum auction that is scheduled for next year.
Banerjee, Duflo and Kremer extensively conducted field experiments using Randomised Control Trials (RCTs), to examine causes and effective solutions to address poverty-related issues such as poor education and health, lack of microcredit, and so on. By comparing a particular outcome (for instance, academic scores or morbidity rates) across two groups that have similar average characteristics, and differ only in having received a particular treatment (receiving textbooks or deworming pills), they try to quantify the impact of various poverty alleviation measures. The results of these experiments have significantly contributed to policy creation in developing countries globally. A series of experiments found that “poor people are extremely price-sensitive regarding investments in preventive healthcare.” This can inform government policies for pricing vaccines (COVID-19 and otherwise); a shift from highly subsidised vaccines to free ones to even giving additional incentives like free foodgrains, can vastly increase vaccine take-up.
Thaler’s work incorporates insights from psychology into economic models, to create a more realistic understanding of human decision-making. For instance, the lack of self-control that occurs when one’s long-term goals are defeated by short-term actions, such as difficulty in making healthier lifestyle choices, and saving for the future. To incorporate this finding into useful policy measures, Thaler and his colleagues suggested that governments try and nudge citizens in the right direction (provided they are not misled or coerced.) This has been used extensively to improve pension savings, organ donation and even handwashing. His research has also shed light on common marketing practices that take advantage of human irrationality; this includes “overexposing the rare winners and covering up the multitude of losers” in lotteries, to inflate people’s expectations of winning. Such insights from Thaler’s work can thus help us self-evaluate how we interpret information and guide us to make better decisions.
Deaton’s work delved into understanding how individuals distribute their spending across different goods and how they choose to save. This is important because until the 1980s, work in development economics was largely theoretical, or limited to aggregate data from national accounts. Deaton’s work paved the way for linking individuals’ choices to understanding aggregate outcomes in an economy. For instance, his analysis of household consumption data in India showed that during adverse periods, there are lesser resources allocated to female children compared to males. This helps us quantify the extent of gender discrimination in an individual household as well as across a country, thus helping us design apt policies to adequately address it. It also informs governments about the importance of frequent and accurate data collection, to track and analyse the micro-level causes for macro-level economic outcomes.
Ostrom’s work challenged the traditional economic thought of “tragedy of the commons”, which suggested that common property be privatised or regulated by central authorities to prevent mismanagement. Ostrom studied various common resources from fisheries to groundwater basins, and found that its exploitation could be avoided by collective local action. Her work delved into understanding the sophisticated methods followed by people to ensure the sustainable and non-exploitative usage of common property. She also explored the diversity and complexity of the combined social and ecological world, and stressed the importance of different approaches to problem-solving rather than a one-size-fits-all institutional approach. This has largely contributed to contemporary discussions around issues like climate change.
Through these contributions by economists, Laureates and otherwise, we find important ways in which we can understand the world around us. What started out as a means to model the working of our economy, has now shifted to understanding how humans interact with the world around them, and the search continues for more efficient and equitable ways to do so. This shift towards making economics more human, beneficial and practical is a hopeful and welcome change in the fate of the ‘dismal science’.
Samyukta is a student of Economics, Finance and Media Studies at Ashoka University. In her free time, she enjoys discovering interesting long-form reads and exploring new board games.
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