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Jean Tirole Wins Nobel in Economics for Work on Regulation Jean Tirole Wins Nobel in Economics for Work on Regulation
(about 3 hours later)
WASHINGTON — Jean Tirole, a French economist, won the 2014 Nobel in economic science on Monday for his work on the best way to regulate large, powerful firms in industries including banking and communications. WASHINGTON — Jean Tirole, a French economist, won the 2014 Nobel Memorial Prize in Economic Science on Monday for his work to improve the regulation of large, powerful companies in industries including banking and communications.
The Royal Swedish Academy of Sciences said that Mr. Tirole, 61, had helped governments tame such firms by analyzing when and how regulators should intervene to constrain activities, and when to stand back. The Royal Swedish Academy of Sciences said Mr. Tirole, 61, had contributed to taming such companies by analyzing when and how regulators should constrain their activities and pricing — and when regulators should stand back.
Mr. Tirole helped show “what sort of regulations do we want to put in place so large and mighty firms will act in society’s interest,” Tore Ellingsen, the chairman of the prize committee, said after the award announcement. Mr. Tirole has helped to show “what sort of regulations do we want to put in place so large and mighty firms will act in society’s interest,” Tore Ellingsen, the chairman of the prize committee, said after the award announcement.
Mr. Tirole, a professor of economics at the University of Toulouse in France, has long appeared on lists of likely prize winners. His work gained particular attention after the 2008 financial crisis, which revealed profound shortcomings in the regulation of financial firms in the United States and Europe. Mr. Tirole is an economist of imperfect markets. In theory, the push-and-pull of competition keeps prices low and quality high. In reality, monopolies or a few companies dominate many markets. They hold the power to keep prices artificially high, and they often lack incentives to innovate or improve quality.
His work focuses on markets that lack the perfect competition portrayed in textbooks, where the push-and-pull among firms keeps prices low and quality high. In reality, many markets are dominated by a small number of firms that have the power to keep prices artificially high, and may lack incentives to improve quality. Furthermore, these firms tend to know much more than their regulators. Economists have long recognized that government regulation of such markets could produce better outcomes for society. Mr. Tirole was a pioneer in the application of mathematics, including game theory, to writing those rules.
After earning a doctorate from the Massachusetts Institute of Technology in 1981, Mr. Tirole began to explore the regulation of such industries. His work has since shown that answers vary by industry, but it has also provided a kind of framework for constructing policies suited to an industry. Mr. Tirole, a professor at the Toulouse School of Economics, had long appeared on short lists of likely laureates, and the award was seen as particularly timely in the wake of the 2008 financial crisis, which revealed significant shortcomings in the regulation of the financial system, and amid rising questions about the market power of technology companies like Google and Apple.
“Many of his papers show, ‘It’s complicated,’ rather than presenting easily summarizable, intuitive solutions, which make for good blog posts,” the economist Tyler Cowen wrote in a blog post after the announcement. He received a doctorate in economics from the Massachusetts Institute of Technology in 1981, and he taught there for eight years before returning to France in the early 1990s. Much of his early work was done in collaboration with his mentor, Jean-Jacques Laffont, and more recently with a revolving cast of other economists, depending on the topic. The results are wide ranging. A description released by the prize committee cited 60 different papers.
In the wake of the financial crisis, Mr. Tirole has been an influential advocate for increased regulation of the banking industry. In an interview broadcast after the announcement, he applauded new liquidity regulations and said that governments needed to pay particular attention to the connections between regulated banks and unregulated parts of the financial system. “Jean Tirole is one of the most influential economists of our time,” the prize committee said in its announcement. “Most of all, he has clarified how to understand and regulate industries with a few powerful firms.”
He also said that a more “global stance” was needed to regulate industries that increasingly operate on a global scale. He mentioned antitrust as an area of progress, and climate change regulation as an area of need. His work, beginning in the 1980s, was in part a response to the need for new rules as European governments divested state monopolies, seeking to encourage investment and innovation while preventing predatory profit margins.
Mr. Tirole told the Nobel Prize website, in a recorded interview, that he had asked his 90-year-old mother to sit down before sharing the news. Mr. Tirole did not offer a single set of new rules. Rather, he applied a set of general principles to the particulars of each industry to derive the appropriate regulations.
Joshua Gans, an economist at the University of Toronto, compared Mr. Tirole to Louis Pasteur as the rare example of a laureate whose work has both advanced the theoretical understanding of economics and directly impacted everyday life.
Mr. Gans pointed in particular to Mr. Tirole’s work on the deregulation of communications networks. Homes are generally connected to networks by a single line, owned by a single company. Governments seeking to foster competition can require that company to sell access to its rivals. But the price is crucial. Too high, and consumers will see little competition. Too low, and the company itself will be unable to serve customers at a profit. In effect, if a company sells both iron and goods made from iron, the question is how much should it charge for the iron.
The pricing model developed by Mr. Tirole and Mr. Laffont is the basis of current law in Europe, New Zealand, Australia and other countries. But not in the United States. Mr. Gans said the difference explains why consumers in those other countries enjoy lower prices and better service.
“The alternative is what happens in the U.S. where Comcast doesn’t give access to its competitors so Time Warner has to decide whether to build over the top of Comcast or just to stay out of their markets,” he said. “Had there been access regulation, maybe Time Warner and Comcast would be competing more directly.”
Another example of the general application of Mr. Tirole’s study of a specific case concerns his work on the credit-card industry in the late 1990s. Credit cards are a “two-sided market,” meaning that the business is in connecting two groups, the credit-card holders and merchants, and profiting from the interaction.
Mr. Tirole and his collaborators developed a model to assess whether companies in such markets were charging reasonable prices. Regulators have since applied their findings to a wide range of companies, particularly technology companies like Google that similarly depend on attracting both consumers and merchants to their platforms.
“We owe Jean Tirole so much,” Joaquín Almunia, the European commissioner for competition, said in a statement on Monday. Mr. Almunia has pressed investigations of Google’s market power, and of bank pricing practices.
Mr. Tirole also has been an advocate for increased financial regulation, including early work on the need to ensure that companies have access to funding during crises.
“Banking is a very hard thing to regulate,” Mr. Tirole said in an interview broadcast on Monday during the awards announcement, in a comment that applies equally well to his views about the regulation of other markets too. Still, he applauded recent efforts to impose liquidity regulations on financial companies.
Mr. Tirole said that regulators needed to pay attention to the links between regulated financial companies like banks and unregulated financial companies. “That is something we had forgotten or ignored before the crisis,” he said.
Mr. Tirole also said that a more “global stance” was needed to regulate industries that increasingly operate on a global scale. He mentioned antitrust as an area of progress, and climate change regulation as an area of need.
The economics prize is the newest Nobel, created in 1969 to celebrate the 300th anniversary of the Bank of Sweden, the world’s first central bank. It is the first time since 1999 an American did not number among the winners.
Mr. Tirole told the Nobel Prize Web site, in a recorded interview, that he had asked his mother, who is 90, to sit down before sharing the news.
He said he himself had needed about 30 minutes to recover.He said he himself had needed about 30 minutes to recover.
The past winners of the economics prize are an eclectic group that includes people with no formal training in economics and members of rival schools of economic thought.
Two of last year’s winners, Eugene F. Fama and Robert J. Shiller, were honored for work on the movements of financial markets — a subject on which they fundamentally disagree. A third economist, Lars Peter Hansen, was the other winner.
Other recent winners include Alvin E. Roth and Lloyd S. Shapley, in 2012; Thomas J. Sargent and Christopher A. Sims, in 2011; and Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides, in 2010.
All of the recent winners except Mr. Pissarides were American citizens, as have been 85 percent of all the economics laureates since 1969. Only one woman has ever won the prize: the American political scientist Elinor Ostrom, in 2009.
The economics prize is the newest of the Nobels, created in 1969 in celebration of the 300th anniversary of the Bank of Sweden, the world’s first central bank.