Paul R. Milgrom and Robert B. Wilson have been declared the winners of this year's Nobel Prize in Economic Sciences “for improvements to auction theory and inventions of new auction formats.” "Their theoretical discoveries have improved auctions in practice. They have also used their insights to design new auction formats for goods and services that are difficult to sell in a traditional way, such as radio frequencies. Their discoveries have benefitted sellers, buyers and taxpayers around the world," the statement announcing the prize read.
Both Milgrom and Wilson are US-born economists and are teaching at Stanford University. The prize money of 10 million Swedish kronor will be shared equally between the laureates.
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 showed why rational bidders tend to place bids below their own best estimate of the common value: they are worried about the winner’s curse—that is, about paying too much and losing out.
At the same time, Milgrom formulated a more general theory of auctions that not only allows common values, but also private values that vary from bidder to bidder. He analysed the bidding strategies in a number of well-known auction formats, demonstrating that a format will give the seller higher expected revenue when bidders learn more about each other’s estimated values during bidding.
“This year’s Laureates in Economic Sciences started out with fundamental theory and later used their results in practical applications, which have spread globally. Their discoveries are of great benefit to society,” said Peter Fredriksson, chair of the Prize Committee.
Born in 1948, Milgrom secured his Ph.D in 1979 from Stanford University, while Wilson, born in 1937, is an alumnus of Harvard University.
