The 2020 Nobel Memorial Prize in economics: the Canterbury connection

Abstract

The 2020 Nobel Memorial Prize in Economics (officially known as The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel), was awarded to two professors from Stanford University, Paul Milgrom and Robert Wilson, ‘for improvements to auction theory and inventions of new auction formats’. What is probably less well-known is the notable impact made by two New Zealand economists, both economics graduates from the University of Canterbury, in shaping the theory of auctions for which the prize was awarded. This paper looks at the ‘web of influence’ among the two New Zealand economists and the two new Nobel prize winners in as far as the development of auction theory is concerned.

KEYWORDS:

• Auction theory
• Nobel prize

JEL Code:

• D44

Acknowledgements

I am very grateful for the excellent research assistance of Josh McSkimming on this project. I am also very grateful to John Riley for helpful feedback on an earlier draft of the paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Vickrey was awarded the prize together with James Mirrlees, for ‘research into the economic theory of incentives under asymmetric information'. However, it is rather clear that Vickrey’s inclusion was largely due to his seminal, and highly influential, work on auction theory, as published in Vickrey (1961). This was the first paper to apply game theoretic tools to analyse the dynamics of auctions, and set the foundation in place for all of the follow-on literature.

2 Myerson’s Nobel prize was awarded in conjunction with Leonid Hurwicz and Eric Maskin, for mechanism design theory. Myerson’s fundamental contribution to the theory of auctions is Myerson (1981). Interestingly, Maskin also contributed directly to the auctions literature as a co-author on several of John Riley’s papers.

3 The awarding of the Nobel to the topic of auctions, along with the substantial contribution of two University of Canterbury economics graduates, is extremely timely as it coincides with the 100th anniversary celebrations of Economics being taught as an independent discipline at the University of Canterbury.

4 For a survey of the literature up to 1999, see Klemperer (1999).

5 Of course, there have been other very important contributors to the auctions literature, such as William Vickrey, Roger Meyerson, Preston McAfee, and Armando Ortega Reichert to name only a few.

6 Essentially, the assumptions are that all bidders are risk neutral, and that personal valuations are uniformly distributed.

7 Vickrey (1961) is by far the most cited paper on auction theory (there are, at the time of writing, 9740 cites to the paper in the posterior literature). However, while Vickrey did publish a few follow-up papers on the topic of auctions, none of them had anywhere near the influence of his first, seminal, paper.

8 To his credit, Wilson is also a ‘Nobel factory' in the sense that he has had considerable success in supervising students who went on to win the Nobel prize. Milgrom is the third of Wilson’s graduate students to have been awarded the Nobel, with the other two being Alvin Roth (Nobel Laureate 2012) and Bengt Holmstrom (Nobel Laureate 2016).

9 McMillan (1994) specifically mentions that Milgrom, Wilson and Preston McAfee were all engaged as expert advisors to the government and major bidding companies in the spectrum auctions.

10 The idea is known as a ‘war of attrition' in which two animals use up energy competing for a mate. Each animal has a value that is a draw from some distribution. The war ends when one animal gives up. The remaining animal wins and both incur the same energy cost. Riley observed that the expected cost to each animal was the same as in the sealed high bid auction.

11 Riley and Samuelson (1981) shows that ‘if the lowest reservation value for which it is worthwhile bidding is the same for two different auction rules, then the expected return to the seller is also the same.’ This result is one of the first to bring into the discussion the idea of a reserve price, or an entry fee that the seller could charge for bidders to participate.

12 In the present consideration of the papers written by the SOF, there are several instances of unpublished working papers, some of which were later published (perhaps with a slightly changed title) in journals or books. I have taken the following strategy in dealing with these. Only papers that have been cited somewhere in the literature (and maybe by the SOF) are included. Thus, if a working paper has been cited, and then later published and the publication has also been cited, then both are included. Any papers that have never been cited, regardless of whether in working paper form or published, are not included.

13 Sadly, McMillan passed away (in 2007), and thus his ability to contribute to the literature is less than the others. McMillan’s academic career was certainly cut short by his unfortunate early passing at an age in which he was an active academic. He published a paper on auctions only 2 years before his death, and has a posthumous publication 3 years after passing.

14 Most of the papers concerned were co-authored with a variety of other economists. For example, 11 of McMillan’s 16 papers were co-authored with Preston McAfee. The others in the SOF, above all Milgrom and Riley, had several different co-authors. Interestingly, none of the SOF authors has co-authored with any other of the SOF (at least on the topic of auctions). The complete list of papers, showing all co-authors, is available (ordered in two different ways) at https://docs.google.com/document/d/1UMaQ9GFjE6iDpPlHPxtUZdNOSXw9VLBBkRnHmoNBH8Q/edit?usp=sharing.

15 All of the citations data presented in this paper are from Google Scholar. The data was current on 1st May 2021.

16 Since 2008, Riley has no auctions papers, McMillan has one (posthumous), Wilson has two, while Milgrom has written twenty-one over the same period.

17 The full stock of 98 SOF papers is available online at https://docs.google.com/document/d/1UMaQ9GFjE6iDpPlHPxtUZdNOSXw9VLBBkRnHmoNBH8Q/edit?usp=sharing, listed in 2 different ways. First, separated out by author, and second, separated out by decade. The second of these shows the time-line of development of the literature produced by the SOF. In order to declutter Figure 1 showing the network of influence among the SOF, the references to the papers exclude co-author names. However, the full reference list contains all of the authorship information for each paper.

18 This graph has been generated by the graphing software Gephi. The source file is available from the author upon request.

19 The paper in question is Milgrom and Weber (1982), and it is the most cited paper from our SOF articles (see Table 2). It has been cited 35 times within the SOF posterior literature, a number which compares well with the 42 times that Vickrey’s (1961) seminal auctions paper appears cited by the SOF articles.

20 Figure 1 only shows 2 papers having been cited in Riley (1981a). The third is Riley (1980a), but the Figure does not include self-cites.

21 There is another paper in our set, namely Wilson (1992), that also cites many prior papers but that has few cites to it. That paper has been cited 360 times in the overall literature, but only 4 times by the SOF. The reason for those numbers is essentially the same as for the Milgrom (1987a) paper, in that Wilson (1992) is more of a survey type of work rather than one that opens new ground.