Jean Tirole has won the 2014 Nobel Prize in Economics. Because he works in microeconomic theory that is not easy going for those without advanced training in mathematics or economics, his is not a well-known name outside the discipline (even econ undergrad students may not have heard of him, though all graduate students will have).
But that doesn’t make his work any less important. His work in economic theory on incentives, principal-agent problems, and ‘industrial organization’ (the term that in practice means the analysis of sectors of the economy that aren’t well explained by simple models of supply-and-demand) yields great insights, and provides the foundations for those working on very ‘real world’ economic problems.
His brilliant text The Theory of Industrial Organization gave me insights on pricing that make their way into the significantly lower-tech book of mine on Strategic Pricing in the Arts, especially his elegant way of structuring the problem of ‘non-linear pricing’ (e.g. price differentials for different quality of product (like different quality of seating in a performance hall) or different quantity of product (like discounts for subscribers over single-ticket purchases)), and showing the common structure to solving problems that on the surface might appear to be quite different. Solutions to ‘practical’ problems in pricing require some sort of theoretical model that provides a framework for moving forward systematically. The economy is complex, and so models are often necessarily complex, but mathematical complexity does not mean irrelevancy; good modeling is about being clear on assumptions being made, and the process of moving from problem to solution.
A most worthy winner of the prize.
UPDATE: Diane Coyle expresses what I wanted to say, with greater elegance. Also see Joshua Gans.
MORE UPDATE: The invaluable Mark Thoma gathers the reactions.
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