Nobel Winners Economics 2010

8/2/2019 Nobel Winners Economics 2010

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Reference: www.wikipedia.org

Assignment on Nobel Laureates in the field of Economic Sciences in 2010

Submitted to: Dr. Sandhya Rani Das

Course: Essential Economics for Management

Submitted by: Subhasish Das

PGDM 1, 2nd Trimester

Regd No. S1016

Centurion School of Rural Enterprise Management

Paralakhemundi, Orissa.


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Introduction:

The Nobel Prizes are the annual international awards bestowed by Scandinavian committees inrecognition of cultural and scientific advances. The will of the Swedish chemist Alfred Nobel,

the inventor of dynamite, established the prizes in 1895. The prizes in Physics, Chemistry,

Physiology or Medicine, Literature, and Peace were first awarded in 1901. The Sveriges

Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was instituted by Sveriges

Riksbank in 1968 and was first awarded in 1969. Although technically not a Nobel Prize, its

announcements and presentations are made along with the other prizes, with the exception of the

Peace Prize which is awarded in Oslo, Norway. Each Nobel Prize is regarded as the most

prestigious award in its field.

Sir Alfred Nobel

The Royal Swedish Academy of Sciences

awards the Nobel Prize in Physics, the

Nobel Prize in Chemistry, and the Nobel

Memorial Prize in Economic Sciences. The

Nobel Assembly at Karolinska Institute

awards the Nobel Prize in Physiology or

Medicine. The Swedish Academy grants the

Nobel Prize in Literature. The NobelMemorial Prize in Economic Sciences,

commonly referred to as the Nobel Prize in

Economics, is an award for outstanding

contributions to the field of economics. The

official name is the Sveriges Riksbank Prize

in Economic Sciences in Memory of Alfred

Nobel.


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Year 2010:

In Physiology or Medicine, It was Robert G. Edwards, In Physics, it was Andre Gem and

Konstantin Novoselov, in Chemistry, it was Richard F. Heck, Ei-ichi Negishi and Akira

Suzuki, in Literature it was Mario Vargas Llosa, in Peace it was Liu Xiaobo. The Sveriges

Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2010 was awarded jointly

to Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides for their

analysis of markets with search frictions".

Peter A. Diamond:

Peter Arthur Diamond (born April 29,

1940) is an American economist known

for his analysis of U.S. Social Security

policy and his work as an advisor to the

Advisory Council on Social Security in the

late 1980s and 1990s. He is an Institute

Professor at the Massachusetts Institute of

Technology. Diamond earned a bachelor'sdegree summa cum laude in mathematics

from Yale University in 1960 and received

a Ph.D. at the Massachusetts Institute of

Technology in 1963.

He was an assistant professor at the University of California, Berkeley from 1964 to 1965 and

an acting associate professor there before joining the MIT faculty as an associate professor in

1966. Diamond was promoted to full professor in 1970, served as head of the Department of

Economics in 198586 and was named an Institute Professor in 1997.Diamond has made fundamental contributions to a variety of areas, including government

debt and capital accumulation, capital markets and risk sharing, optimal taxation, search and


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matching in labor markets, and social insurance. Diamond (1965) extended the standard

infinitely lived agent Ramsey growth model, to a set up where new individuals are

continually being born and old individuals are continually dying. He built on a framework

developed by Paul Samuelson, who had termed it `an exact consumption-loan model'. Diamond and Mirrlees (1971) provided sufficient conditions for a second best Pareto efficient

allocation with linear commodity taxation to require efficient production when a finite set of

consumers have continuous single-valued demand functions.Diamonds paper(1982) is oneof the first papers which explicitly model the search process involved in making trades

and hiring workers, which results in equilibrium unemployment.This aspect of economic

research search theory has been frequently applied to labor markets in the years

since, in an attempt to see how the needs of individuals and employers are met. Diamonds

career has covered topics from public finance to taxation, Social Security, labor markets and

behavior economics. Diamonds work modeling the uncertainties and imperfections (or

frictions) of markets has been used in many ways. The aim of his studies of markets was to

pay much closer attention to how the economy plays out in real time than in the simplest

abstractions of how markets work. In the labor market, it takes time for workers to find

suitable jobs, it takes time for employers to find suitable workers, and that dynamic has

a feedback into how wages are determined and how efficient the economy is.

This subject is particularly relevant in the current economic situation. Its very important

that people get back to work, because if theyre out of work too long, it breaks the connection

to the labor market and the economy functions more poorly thereafter, Diamond said at his

press conference.He was awarded the Nobel for his seminal work on search theory, thetheory of the frictions and incentives involved in the process of matching.

One paper Diamond wrote in the 1960s, National Debt in a Neoclassical Growth Model,

became a widely used model of public debt. In the early 1970s, Diamond published widely

influential work on taxation, including a pair of 1971 papers on Optimal Taxation and

Public Production, co-written with economist James Mirrlees that outlined what kind of tax

regime leads to the highest production efficiency available in an economy.
http://ramsey%20growth%20model.pdf/http://ramsey%20growth%20model.pdf/http://ramsey%20growth%20model.pdf/


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Dale T. Mortensen:

Dale Thomas Mortensen (born February 2,

1939 in Enterprise, Oregon) is an

American economist. He received his B.A.

in economics from Willamette University

and his Ph.D. in Economics from Carnegie

Mellon University. He was a member of

the Beta Theta Pi fraternity. He has been

the faculty of Northwestern University

since 1965 and a professor of Managerial

Economics and Decision Sciences at the

Kellogg School of Management since

1980. He is also the Niels Bohr Visiting

Professor at the School of Economics and Management, University of Aarhus, from 2006 to

2010.

Mortensen's research focuses on labor economics, macroeconomics and economic theory. He

is especially known for his pioneering work on the search and matching theory of frictional

unemployment. He has extended the insights from this work to study labor turnover and

reallocation, research and development, and personal relationships. He was awarded theNobel Prize in Economics in 2010 for "for the analysis of markets with search frictions".

Dale Mortensens models help us to understand the ways in which unemployment, job

vacancies, and wages are affected by regulation and economic policy.

Awards:

1. Alexander Henderson Award, 1965.2. Fellow, Econometric Society, 1979.3. Fellow, American Academy of Arts and Sciences, 2000.4. IZA Prize in Labor Economics, 2005.5. Nobel Prize in Economics 2010.


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Christopher A. Pissarides:

Christopher Antoniou Pissarides (born 20

February 1948) is a Cypriot economist. Hecurrently holds the Norman Sosnow Chair

in Economics and is the Director of the

Research Programme on Macroeconomics

at the Centre for Economic Performance at

the London School of Economics. His

research interests focus on several topics

of macroeconomics, notably labor,

economic growth, and economic policy.

In 2010, he was awarded the Nobel Prize in economics, jointly with Peter A. Diamond and

Dale Mortensen, for his contributions to the theory of search frictions and macroeconomics.

Pissarides was born in Cyprus in a Greek-Cypriot family. He received his B.A. in Economics

in 1970 and his M.A. in Economics in 1971 at the University of Essex.[2] He subsequently

enrolled in the London School of Economics, where he received his PhD in Economics in

1973 under the supervision of the mathematical economist Michio Morishima.

He is an elected fellow of the British Academy, the Econometric Society, the European

Economic Association and the Society of Labor Economists. He is also a member of Council

of the European Economic Association and the Econometric Society and a former member of

Council of the Royal Economic Society. He is the chairman of the Economica board, and a

member of other editorial boards, a research fellow of the Centre of Economic Performance

at LSE (and a former head of its Macroeconomics Research Programme), of the Centre for

Economic Policy Research (London), and of the Institute for the Study of Labor (IZA, Bonn).

He is also a Non-National Senior Associate, Forum for Economic Research in the Arab

Countries, Iran and Turkey and a former member of the Monetary Policy Committee of the

Central Bank of Cyprus (2000-2007). He has served on the European Employment Task

Force (2003) and he has been a consultant on employment policy and other labor issues for

the World Bank, the European Commission, the Bank of England and the OECD.


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In 2005 he was awarded the IZA Prize in Labor Economics (jointly with Dale Mortensen) for

his work on unemployment and in 2008 he received the Republic of Cyprus "Aristeion" for

the Arts, Literature and Science.

Pissarides is mostly known for his contributions to the search and matching theory for

studying the interactions between the labor market and the macro economy. He helped

develop the concept of the matching function (explaining the flows from unemployment to

employment at a given moment of time), and pioneered the empirical work on its estimation.

More recently Pissarides has done research on structural change and growth.

Pissarides' most influential paper is arguably "Job Creation and Job Destruction in the

Theory of Unemployment" (with Dale Mortensen)", published in the Review of Economic

Studies in 1994. The Mortensen-Pissarides model that resulted from this paper has been

exceptionally influential in modern macroeconomics. Pissarides' book Equilibrium

Unemployment Theory, a standard reference in the literature of the macroeconomics of

unemployment, is now in the second edition, and was revised after Pissarides's joint work

with Mortensen, resulting in the analysis of both endogenous job creation and destruction.

He won the Nobel Prize jointly for his work on the economics of unemployment, especially

job flows and the effects of being out of work. He said: Our research looks at what

happens to someone who loses his or her job because of changes in economic

environment. We have created a model which allows us to analyze the processes and

decisions, such as policy, which affect how long it is before someone finds productive

employment again. Until we began the work there was no way of thinking about these

issues.

The Award Winning Model:

Diamond Coconut Model: The Diamond coconut model is an economic model

constructed by the American economist and 2010 Nobel laureate Peter Diamond which

analyzes how a search economy in which traders cannot find partners instantaneously

operates. The model was first presented in a 1982 paper published in the Journal of Political

Economy. The main implication of the model is that people's expectations as to the level of

aggregate activity play a crucial role in actually determining this level of aggregate economic

activity. A frequent interpretation of its conclusion, as applied to the labor market, is that the

so called Natural Rate of Unemployment may not be unique (in fact there may exist a


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continuum of "Natural Rates") and even if it is unique, it may not be efficient. The model

takes its name from the abstract set up imagined by Diamond. He envisioned an island (a

closed economy) populated by individuals who only consume coconuts. Coconuts are

obtained by being picked (they are "produced") from palm trees at a cost. Because of a

particular taboo existing on this island a person who has picked a coconut cannot consume it

themselves but must find another person with a coconut. At that point the two individuals can

trade their respective coconuts and eat them. The key point is that when an individual finds a

palm tree, because climbing the tree is costly, they will only be willing to climb it to get a

coconut if there are a sufficiently high number of other individuals who are willing to do

likewise. If nobody else is obtaining coconuts then there won't be any potential trading

partners and climbing the tree is not worth it. Hence, what individuals believe others will do

plays a crucial role in determining the overall outcome. As a result people's (fully rational)

expectations become a self-fulfilling prophecy and the economy can wind up with multiple

equilibria, most if not all of them characterized by inefficiency.

Population flows in the model: The agents in the model are always in two "states"; they are

either currently carrying a coconut or looking for someone to trade it with, or they are

searching for a palm tree in order to possibly pick a coconut. The number of agents who are

carrying a coconut at time t is denoted by e(t) (for "employed") and they find trading partnersat the rate b(e(t)) at which point they trade coconuts, earn incomey and become "searchers".

The fact that the probability of finding a trading partner is increasing in the number of people

who already have coconuts - mathematically b'(e) > 0 - represents a "thick market

externality"; the "thicker" the market in the sense of more potential traders, the more trades

occur. It involves an externality because each person who chooses to pick a coconut does so

with only their own self interest in mind, but the fact that they do so has an effect on the

overall social outcome.

People who are currently looking for coconut palm trees find these at a random rate f. This

means that the finding of palm trees follows a Poisson process characterized by the parameter

f. If total population is normalized to 1 (hence, e(t) is the share of the population that is

employed) then the number of searchers in this economy is 1 e(t). Each state can be thought

of as a form of an asset, for example, the asset "having a coconut". The present discounted

value of this asset depends on the benefit or cost incurred when a person finds a trading

partner or a palm tree (this is like a onetime divident payment), and the capital gain (or loss)


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involved in switching states when a trade or coconut-picking occurs. Additionally, out of

steady state, the value of the asset may fluctuate over time. Mathematically, the present

discounted value of having a coconut is given by:

where Ve is the value of having a coconut, Vu is the value of being in the state "looking for a

palm tree", y is the gain to be realized upon finding a trading partner and ris the discount

rate which measures individual's impatience. Likewise, the present discounted value of

searching for palm trees is given by

Where fis the rate at which searchers find palm trees, and E(c) is the expected cost (hence it

enters with a minus sign) of climbing a palm tree when one is found.

In the general version of the model, the cost of climbing a palm tree is a random draw from

some (publicly known) Probability distribution with non-negative support, for example

the Uniform distribution on (clow,chi). This means that on the island "some trees are tall and

some are short", and as a result picking coconuts from them can be hard or easy.

Simple mathematical version of the model:

In the most simple version of Diamond's model, the probability of finding a trading partner -

another person who's carrying a coconut - is exactly equal to the share of the population that

is currently in possession of a coconut, b(e) = e. Additionally the cost of obtaining a coconut

when one finds a palm tree is constant, at c (this is the "all trees are of the same height"

assumption). The evolution of the proportion of people who are currently carrying coconuts

and looking for trading partners is given by:

if every searcher who finds a palm tree chooses to climb it and obtain a coconut, and

if every searcher who finds a palm tree chooses not to obtain a coconut when

coming upon the opportunity of doing so. In the first equation f(1 e) is just the number of


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searchers who happen to find a palm tree at a particular time t(the "inflow" of coconut

carriers), while e2

is the number of previous coconut-carriers who managed to successfully

find a trading partner and hence reverted back to being searchers (the "outflow"). In the

second equation, since nobody ever bothers to climb a tree and obtain coconuts, the number

of coconut-carriers simply declines over time.

The steady state:

In the steady state of this economy, the number of searchers and the number of coconut

carriers has to be constant, . Hence there are two possible steady state in the simple

version of the model. The "bad" outcome where nobody who finds a palm tree picks a

coconut so that e * = 0 and an interior equilibrium

where . The bad results occurs if everyone who finds a

palm tree believes that not enough other people will pick coconuts and as a result it is not

worth it to pick the coconut themselves. This then becomes a pessimistic self-fulfilling belief.

Whether or not the good outcome is possible depends on parameter values, and as these

determine the value of each asset in steady state. In this case the value of the assets will be

constant so that and we can solve for the difference between Ve and Vu:

. For it to be worth it to climb a palm tree this difference has to be

greater than the cost of climbing a tree. Ife*

= 0 we have fc / (r+ f) > c which means no one

will want to pick coconuts. Hence e = 0is indeed an equilibrium. Otherwise we

need . Note that this e is independent offwhile the e*

given above is a function

offonly. This means that the critical value ofe could be below or above the "good" steady

state value. If costs of climbing the tree are high, or the agents are very impatient (high r)

then e = 0 will be the only equilibrium. Ifc and rare low then there will be two equilibria,

and which one the economy winds up at will depend on initial conditions (the level of

employment that the economy begins with).

The matching theory and function: Matching theory is a mathematical frameworkdescribing the formation of mutually beneficial relationships over time. It offers a way of


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modeling markets in which frictions prevent instantaneous adjustment of the level of

economic activity which has been used as a framework for studying frictional unemployment.

A matching function is a mathematical relationship that describes the formation of new

relationships (also called 'matches') from unmatched agents of the appropriate types. For

example, in the context of job formation, matching functions are sometimes assumed to have

the following 'Cobb-Douglas' form:

Where , and are positive constants. In this equation, represents the number of

unemployed job seekers in the economy at a given time , and is the number of vacant

jobs firms are trying to fill. The number of new relationships (matches) created (per unit of

time) is given by .

A matching function is in general analogous to a production function. But whereas a

production function usually represents the production of goods and services from inputs like

labor and capital, a matching function represents the formation of new relationships from the

pools of available unmatched individuals. Estimates of the labor market matching function

suggest that it has constant returns to scale, that is .

If the fraction of jobs that separate (due to firing, quits, and so forth) from one period to the

next is , then to calculate the change in employment from one period to the next we must

add the formation of new matches and subtract off the separation of old matches. A period

may be treated as a week, a month, a quarter, or some other convenient period of time,

depending on the data under consideration. (For simplicity, we are ignoring the entry of new

workers into the labor force, and death or retirement of old workers, but these issues can be

accounted for as well.) Suppose we write the number of workers employed in period

as , where is the labor force in period . Then given the matching

function described above, the dynamics of employment over time would be given by

.

For simplicity, many studies treat as a fixed constant. But the fraction of workers

separating per period of time can be determined endogenously if we assume that the value of

being matched varies over time for each worker-firm pair (due, for example, to changes

in productivity).

Nobel Winners Economics 2010

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