Emeritus professors garner Nobel Prize in economics
Emeriti Michael Spence of the Graduate School of Business and Joseph E. Stiglitz of the Department of Economics shared the 2001 Nobel Memorial Prize in Economic Sciences with George A. Akerlof of the University of California-Berkeley for their work in information economics.
Two Stanford professors emeriti were awarded the 2001 Nobel Memorial Prize in Economic Sciences on Oct. 10. Michael Spence, the Philip H. Knight Professor, Emeritus, and former dean of the Graduate School of Business, and Joseph E. Stiglitz, the Joan Kenney Professor of Economics, Emeritus, share the prize of nearly $1 million with George A. Akerlof of the University of California-Berkeley.
The Royal Swedish Academy of Sciences awarded the prize for the trio’s work in “information economics.” In the 1970s, the laureates laid the groundwork for a theory about markets with “asymmetric information.” Their research explored how agents with differing amounts of information affect many kinds of markets. Their theories have had real-world applications in areas from agricultural markets to modern financial markets.
Both Spence and Stiglitz did seminal research at Stanford early in their careers. “In a real sense, this is a Stanford economics prize, because both Spence and Stiglitz were faculty members in the Economics Department in the 1970s, and that is the research that’s been rewarded here,” said Gavin Wright, chair of the Economics Department.
As a result of Spence and Stiglitz’s award, Stanford now claims 17 living Nobel laureates — 14 affiliated with the university and three affiliated with the Hoover Institution.
Spence, 58, still lives on Stanford’s campus and has continued to teach at the business school after his retirement, while Stiglitz, also 58, took a faculty position at New York’s Columbia University this fall.
A crowd of about 200 professors, students and alumni gathered to congratulate Spence with a champagne toast at the Graduate School of Business upon his return from Hawaii, where he first heard about the prize while at his vacation home. Dressed in a dark suit and without a tie, Spence told the audience Friday evening that he and his wife Monica “are quite overwhelmed by the response” to the award. Over 550 e-mails already have filled his inbox. “I don’t think this has completely soaked in for me — it’s kind of life-changing,” he said.
Thanking his colleagues, Spence said that “everything that I and other scholars do comes out of a community of scholars.”
The news of his award was greeted with enthusiasm by that community.
“The recognition the Nobel committee has bestowed on Michael Spence reaffirms our conviction that a great business school must be driven by the desire to produce original research and create knowledge that benefits society,” said President John Hennessy. “Professor Spence brings great honor to that and great honor to Stanford. His contributions to the university — as teacher, scholar and dean of the business school — have always been on the highest order. I know I speak for the entire Stanford community when I say that we are proud to call him a colleague,” Hennessy added.
“We’re immensely proud and very pleased that Michael’s work has been recognized,” said Robert Joss, the Philip H. Knight Professor and Dean of the Graduate School of Business. Spence is the third Nobel laureate in economics at the business school.
Research into asymmetric information gave economists a way to measure such things as risks faced by a lender who lacked information about a borrower’s credit worthiness. It also explored how people with inside knowledge of a technology company’s financial prospects gain an edge over other investors, while people who don’t fully understand a company’s finances may invest unwisely.
Spence’s work showed that under certain conditions, well-informed agents can improve their market outcome by “signaling” their private information to those who know less. His economic models demonstrated how information could be used to communicate a superior position. For example, an auto dealer might be able to signal he had a better car by offering a warranty. The management of a firm might use an additional tax cost of dividends to signal high profitability.
“Spence’s thesis was one of the great milestones of economic theory in the past 50 years,” said David Kreps, the Paul E. Holden Professor of Economics at the Graduate School of Business.
Spence taught at Stanford as an associate professor of economics from 1973 to 1975, when he became professor of economics and business administration at Harvard. Spence served as the dean of the Faculty of Arts and Sciences at Harvard from 1984 until 1990.
He then returned to Stanford, where he was dean of Stanford’s Graduate School of Business from 1990 to 1999. After stepping down from his post as dean at the business school, he became a partner in Oak Hill Capital Partners and Oak Hill Venture Partners, where he has managed a number of high-technology investments. He has continued his activities at the business school, most recently co-developing and teaching a course on e-commerce. Spence plans to build on the research that won him the Nobel by examining the impact of the Internet on his concept of signaling.
Stiglitz first came to Stanford as a professor of economics from 1974 to 1976 and he returned to the same position in 1988. He was awarded the endowed Kenney chair in 1992 — a post previously held by Nobelist Kenneth Arrow. Stiglitz also was a senior fellow at Stanford’s Hoover Institution.
In the early 1990s, Stiglitz went on leave from the Economics Department to work in Washington, D.C. He first served as a member of President Bill Clinton’s Council of Economic Advisers in 1993 and became the group’s chairman in 1995. From 1997 until late 1999, Stiglitz was chief economist at the World Bank. He taught at Stanford in Washington before retiring from the Stanford faculty and taking a position at Columbia, where he is now professor of economics, business and international affairs.
Outside the world of politics, Stiglitz is best known for his work as a founder of the economics of information. Stiglitz’s research showed that a player with poor information can capture the information of someone with better data by offering choices to the better-informed agent. Insurance companies, for example, divide their clients into risk classes by offering a range of policies where lower premiums can be exchanged for a higher deductible. Stiglitz called this process “screening.”
Stiglitz was making coffee when he got the call from the Nobel committee. “I quickly switched from coffee to champagne,” he said.
Stiglitz continues to believe in the power of economics to improve people’s lives by “focusing on the difference between the haves and have-nots,” he said. “Our global system is characterized by a lot of inequities. It seems increasingly important to try to redress these inequities,” Stiglitz added.
Earlier in their careers, both Spence and Stiglitz were consecutive recipients of the prestigious John Bates Clark Medal, awarded by the American Economic Association every two years to an outstanding economist under 40. (Stiglitz won the medal in 1979; Spence in 1981.)