2020 Economics Nobel Prize: Paul Milgrom and Robert Wilson

Congratulations to Paul Milgrom and Robert Wilson for the 2020 Nobel Prize in Economics. Below is an excerpt from the press release.

Using auction theory, researchers try to understand the outcomes of different rules for bidding and final prices, the auction format. The analysis is difficult, because bidders behave strategically, based on the available information. They take into consideration both what they know themselves and what they believe other bidders to know.
Robert 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.
Paul 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.
Over time, societies have allocated ever more complex objects among users, such as landing slots and radio frequencies. In response, Milgrom and Wilson invented new formats for auctioning off many interrelated objects simultaneously, on behalf of a seller motivated by broad societal benefit rather than maximal revenue. In 1994, the US authorities first used one of their auction formats to sell radio frequencies to telecom operators. Since then, many other countries have followed suit.

Do the laureates have a health care connection? The answer is ‘yes’! Paul Milgrom’s most cited (non-textbook) paper is studies titled “Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design.” The study discusses how to set up contracts one some components of quality can be observed by the principal but some cannot. It is a cautious tale on payer value-based purchasing arrangements with providers. Paul Milgrom’s co-author on the study, Bengt Holmstrom, actually won the Nobel Prize in 2016.

More commentary on the 2020 Economics Nobel prize winners can be found here:

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