U.S. Economists Ostrom, Williamson Win Nobel

So much for timing.

After a year of volatile decision-making in the stock market, the Nobel committee awarded its prize in economics to two American economists who studied choices in non-market institutions. Oliver Williamson, a professor of business, economics and law at the University of California, Berkeley, was selected for his work in economic choices within large corporations, and Elinor Ostrom, a political science professor at Indiana University, was picked for her study of choices made about common property.

The Nobel committee said each winner made contributions to the understanding of economic governance and how to determine what kinds of institutions work most efficiently in particular situations. Williamson’s work on large firms studied why such companies grow to be as big as they do and focused on explaining the advantages and drawbacks of consolidation. He found that vertically-integrated corporations can be more efficient in situations where top-down authority can resolve conflicts more quickly than negotiations in a marketplace, but that authority can also be abused.

Ostrom’s work has evaluated different ways of regulating the use of common property or natural resources. She found that collective ownership works better than classical theories of self-interest would suggest. In some cases, collective self-policing by a group of local people preserves resources better than privatization or government regulation, according to her research.

In selecting these economists, the Nobel committee has taken a long-term view, rather than reacting to the crisis over the past year, says Mark Gertler, a professor of economics at New York University. “That’s what the prize should be about, and not the heat of the moment,” Gertler says.

The Nobel committee came under fire last week after the Peace Prize was awarded to President Obama. Critics said the committee’s decision appeared more forward-looking and had not been validated by the president’s accomplishments. The committee stood by its choice. (The economics prize is awarded by a separate body.)

Economists say the economics prize winners’ work has been influential but is also relevant to the issues of the day. Williamson’s study of internal governance is relevant to understanding what went wrong within financial firms, says Roger Myerson, an economics professor at the University of Chicago.

And finding dependable information on the reliability of financial products like mortgage-backed securities is a “common pool problem,” like the problems Ostrom’s work has examined, Myerson says.

Ostrom is the first woman to win the prize, officially called the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. “That’s not the most important thing about Elinor Ostrom’s work, but it’s a very important thing for our profession,” Myerson says.