Monday, October 12, 2009

Elinor Ostrom and Oliver Williamson Win Nobel in Economics

Congratulations to Elinor Ostrom and Oliver Williamson for receiving this year's Nobel Prize in Economics. I am thrilled with both of these choices. Both have done much to further our understanding of how institutions affect human behavior.

Alex Tabarrok gives a good summary of Ostrom's work:

Elinor Ostrom may arguable be considered the mother of field work in development economics. She has worked closely investigating water associations in Los Angeles, police departments in Indiana, and irrigation systems in Nepal. In each of these cases her work has explored how between the atomized individual and the heavy-hand of government there is a range of voluntary, collective associations that over time can evolve efficient and equitable rules for the use of common resources...

Elinor Ostrom's work culminated in Governing the Commons: The Evolution of Institutions for Collective Action which uses case studies to argue that around the world private associations have often, but not always, managed to avoid the tragedy of the commons and develop efficient uses of resources. (Ostrom summarizes some of her findings from this research here). Using game theory she provided theoretical underpinnings for these findings and using experimental methods she put these theories to the test in the lab.

For Ostrom it's not the tragedy of the commons but the opportunity of the commons. Not only can a commons be well-governed but the rules which help to provide efficiency in resource use are also those that foster community and engagement. A formally government protected forest, for example, will fail to protect if the local users do not regard the rules as legitimate. In Hayekian terms legislation is not the same as law. Ostrom's work is about understanding how the laws of common resource governance evolve and how we may better conserve resources by making legislation that does not conflict with law.

Ostrom is the first woman to receive the Nobel Prize in Economics. (It has been awarded to 62 men.) Her work is very popular here at GMU. I had the privilege of meeting Ostrom and her husband, Vincent, at a conference here in DC several years ago. I know many of my professors and classmates will be extremely pleased with Ostrom's award.

Sean Safford has more thoughts on Ostrom. Steven Levitt admits he wasn't sure who she was.

Alex Tabarrok also explains more about Williamson's prize:
Transaction cost economics is all about applying these ideas in different settings to figure out the best governance structures (marriage, vertical integration etc.) in different circumstances. How does one deal with expensive investments (such as highly individual dies or plant construction) that are specific to a given trade and put the investor at risk yet which increase productivity? Williamson analyzes how firms come to rely on long term contracts or vertical integration or other seemingly non-competitive solutions to enhance market productivity. Early generations of antitrust enforcers often saw these as monopolistic dealings, but scholars such as Williamson helped us understand how these are essential to the workings of the invisible hand...

Williamson's paper, The Economics of Governance (working version) published in the May 2005 AER is an excellent recent summary of his views in the area. Williamson's work is notable for inspiring a large body of empirical and theoretical work in modern industrial organization and having influence in law, political science, and management. His work has been widely cited, and by some counts he was the most widely cited economist in the world.
Here is a PDF from the Nobel Committee explaining more about this year's pick.

Congratulations to both new Nobel Laureates!

P.S. -- Economix has a good roundup of economists' reactions to this year's Nobel winners.


charles said...

I am a great fan of Elinor Ostrom; Governing the Commons influenced me a great deal as I began my graduate work in Policy Studies.

thinking said...

Congrats to both.

It's nice to see a woman finally win the prize in economics.

Women have great contributions to make in economics; among them being able to offer strong perspectives on the importance of relationships and community in economics.