STOCKHOLM (AFP) — Leonid Hurwicz, Eric Maskin and Roger Myerson of the United States won the 2007 Nobel Economics Prize on Monday for their pioneering work on making markets work more efficiently.
The Nobel jury said the three took the prize for their work on Mechanism Design theory, a sub-field of economics that looks at ways to make imperfect markets -- be they of economic or social exchanges -- work better than they do.
The theory, initiated by Hurwicz in 1960 and further developed by Maskin and Myerson in the late 1970s, "has helped economists identify efficient trading mechanisms, regulation schemes and voting procedures," the jury said.
The theory can, for example, help identify mechanisms that would realise the largest gains from trade, maximize a seller's expected gain or provide an insurance scheme that gives the best coverage without inviting misuse.
Classical economic theory imagines an ideal world where markets work 100 percent efficiently to bring buyers and sellers together as they exchange rare resources.
In reality, however, such pure markets rarely exist -- consumers may not be fully informed about their choices while there may also be additional, social costs beyond price, as in pollution for example, the jury said.
At the same time, many transactions may take place within companies or between interest groups or governments that upset the workings of an idealised market place, it said.
Economists of Mechanism Design theory tackle these imperfect markets with the aim of ensuring that they are as efficient as possible, having to calculate and value very complex models as they do so.
A typical test might be how to design a new tax system, to see whether social welfare provisions go to the most needy or assess how government regulation affects specific sectors.
The ultimate aim of the theory, as the Nobel jury put it, is to allow us "to distinguish situations in which markets work well from those in which they do not.
"Today, Mechanism Design theory plays a central role in many areas of economics and parts of political science."
The Nobel jury credited Hurwicz with beginning to develop the theory in 1960 while Myerson and Maskin began refining the issues involved in the late 1970s, especially in the area of optimising benefits.
Maskin said he was shocked to win the prize.
"I haven't really had a chance to let it sink in yet. It's very exciting but it hasn't really registered yet," he told Swedish Radio.
Hurwicz, born in Moscow, is Regents' Professor of Economics Emeritus at the University of Minnesota and in 1990 won the US National Medal of Science in Behavioural and Social Science for his pioneering work in mechanism design.
At age 90, he is the oldest person ever to win a Nobel prize.
Maskin, 56, is professor of social science at Princeton University and Myerson, also 56, is professor of economics at the University of Chicago.
Last year, the economics prize went to Edmund Phelps of the United States for his work on how overall economic policy affected welfare for present and future generations.
This year's laureates will receive a gold medal, a diploma and 10 million Swedish kronor (1.53 million dollars, 1.08 million euros), to be shared between them.
The formal prize ceremony will be held in Stockholm, as tradition dictates, on December 10, the anniversary of the death in 1896 of the prize's creator, Swedish industrialist and inventor of dynamite Alfred Nobel.
The Nobel prizes were first awarded in 1901 after Nobel bequeathed his fortune to their creation in his 1895 will.
The economics prize is the only one not originally mentioned in the will, having been created by the Swedish Central Bank to mark its tercentenary in 1968. It was first awarded in 1969 and is also funded by the bank.
The economics prize wraps up this year's Nobels after medicine, physics, chemistry, literature and peace.
On Friday, the peace prize went to former US vice president Al Gore and the UN's top climate panel for their efforts to combat global warming. British writer Doris Lessing won the literature prize.
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