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Stanford Report, October 10, 2001

Stanford's Spence wins Nobel for economics


A. Michael Spence, Philip H. Knight Professor, Emeritus, and former Dean of the Graduate School of Business, was awarded the 2001 Nobel Memorial Prize in Economic Sciences Wednesday. He shares the prestigious $1 million prize with George A. Akerlof of the University of California at Berkeley and Joseph E. Stiglitz of Columbia University.

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 so-called "asymmetric information." Their work explained how agents with differing amounts of information affect many different kinds of markets. In its announcement, the Royal Swedish Academy of Sciences said that the winners' contributions "form the core of modern information economics." Their work has led to real world applications in areas ranging from agricultural markets to modern financial markets, according to the academy.

"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 idea 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."

As a result of Spence's award, Stanford is now home to 16 living Nobel laureates -- 13 affiliated with the university and three affiliated with the Hoover Institution.

Economics Professor Roger Noll, left, and A. Michael Spence at a campus discussion in August 1994 on research and the national interest. Photo: L.A. Cicero

"We're immensely proud and very pleased that Michael's work has been recognized," said Robert Joss, dean of the Graduate School of Business. Spence is the third Nobel laureate in economics at the Graduate School of Business.

Reached in the middle of the night at his vacation home in Hawaii, Spence, 58, said, "It's wonderful. It's an incredible honor to be recognized for something that people perceive as moving the ball down the field on one's academic discipline."

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. The theory also helps economists explain why the recent bubble in high-technology stocks burst.

"Mike's fundamental insight lets us understand a huge range of real world phenomena from the connection of earnings and education through competitive pricing to the use of apparently uninformative advertising," said colleague John Roberts, the John H. and Irene S. Scully Professor of Economics, Strategic Management, and International Business at the Graduate School of Business. "Such insights come very, very, rarely."

Akerlof showed that imperfect information on the part of lenders or prospective car-buyers caused borrowers with weak repayment prospects or sellers of low-quality cars to crowd others out of the market.

Spence's work showed that under certain conditions well-informed players 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.

Kenneth J. Arrow, a 1972 recipient of the Nobel Prize in economics and the Joan Kenney Professor of Economics, Emeritus, at Stanford added: "It was one of my great pleasures to supervise this dissertation. We had many exciting interchanges as he would come up with new results each day. It was clear at the time that he was breaking new ground."

Stiglitz showed that a player with poor information can capture the information of someone with better data through "screening" such as providing choices from a menu of contracts for a transaction. Insurance companies, for example, are able to divide their clients into risk classes by offering different policies where lower premiums can be exchanged for a higher deductible. Stiglitz is the former Joan Kenney Professor of Economics at Stanford and was also a senior fellow at the Hoover Institution.

Born in Montclair, NJ, and raised in Toronto, Canada, Spence earned his PhD at Harvard in economics in 1972. He has held professorships at both Stanford Business School and Harvard and has also been dean at both universities. He served as 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 earned his undergraduate degree in philosophy at Princeton summa cum laude and was selected for a Rhodes Scholarship. He was awarded a B.A. from Oxford in mathematics. He taught at Stanford as an associate professor of economics from 1973 to 1975 when he became professor of economics and business administration at Harvard. In 1983, he was awarded the John Kenneth Galbraith Prize for excellence in teaching and the John Bates Clark medal for a "significant contribution to economic thought and knowledge." Spence served as the Dean of the Faculty of Arts and Sciences at Harvard from 1984 until 1990.

Spence sits on the boards of Nike, General Mills, and Siebel Systems. He has authored three books and about 50 articles in professional journals.

A. Michael Spence