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Jean Tirole? Why did he receive the Nobel Prize in economics?

It’s been quite the year for French economists. First the Thomas Piketty frenzy of last spring, and now Jean Tirole of the University of Toulouse has become the first French economist to win the Nobel Prize in economics in more than 25 years.

Tirole won for his work on market power and regulation — specifically how to regulate oligopolies, when just a few firms dominate a particular market and keep prices artificially high, and for situations of asymmetric information, when regulators don’t know everything about how firms are operating.

Most economic theory, before Tirole hit the scene in the 1980s, assumed the market would resemble one of two extremes: perfect competition or domination by a single firm (aka monopoly). Much of the regulatory muscle for those scenarios consisted of price caps for monopolists and preventing cooperation among competitors.

Tirole is known for using game and contract theory to show that regulatory principles are industry-specific: what works in one market may not work in another, and may actually do more harm than good. The Nobel Committee recognized his work applying general regulatory frameworks to a range of industries, from telecommunications to banking. But seeing the difference between those industries is “the beauty of Tirole’s work,” said Tore Ellingsen, chairman of the economics prize committee.

The French economist advocated for increased banking regulation after the 2008 financial crisis and, Ellingsen said, many of his proposals in that realm could reduce the likelihood of another financial crisis. “To a relatively small degree,” Ellingsen admitted when pressed by a reporter at Monday’s press conference, Tirole’s recognition is a political prize. Indeed, the Nobel Committee’s press release ends with the strong public policy implications of Tirole’s work: “Drawing on these new insights, governments can better encourage powerful firms to become more productive and, at the same time, prevent them from harming competitors and customers.”

Ellingsen views Tirole’s theorizing like engineering — setting the framework for policy makers to make the actual regulation — and it’s the applicability of that theorizing that’s been the main source of praise coming from the economics blogosphere Monday.

(IO stands for industrial organization.)

And Tyler Cowen, writing on his Marginal Revolution blog:

He is a broader economist than many of his fans realize. … Many of his papers show “it’s complicated,” rather than presenting easily summarizable, intuitive solutions which make for good blog posts. That is one reason why his ideas do not show up so often in blogs and the popular press, but they nonetheless have been extremely influential in the economics profession.

“A Nobel Prize for Real World Economics,” says the Enlightened Economist blog, written by Diane Coyle.

As Joshua Gans writes for Digitopoly, it’s rare for a Nobel winner to make both a significant theoretical contribution and to have a direct impact on people’s lives. One notable exception, he notes, would be Louis Pasteur, whose academic contribution was to found microbiology, the applied impact of which was vaccination.

It is safe to say that it would be hard to find a Nobel prize winning economist in the last decade that so squarely falls into Pasteur’s Quadrant than Jean Tirole, this year’s winner. Let’s start with the academic dimension. His work has been cited 80,000 times (let me check the number of zeros on that; yep that’s right) and so regularly tops the list of economists likely to win a Nobel prize on that dimension alone….

His work on regulation has influenced virtually all price and non-price regulation of firms with market power for two decades. It was not simply because he used information economics to understand regulation. Instead, he was there thinking about these problems as they arose and literally wrote the book on those issues….

Of particular importance, Gans notes, has been Tirole’s work on telecommunications regulations.

But we know that if you leave firms to come up with the terms of the cooperation themselves, they are going to find a way to remove the competitive parts as well. Regulators did not understand that before Tirole. To be sure, there was nervousness but before then there were no rules as to how to deal with it. Tirole solved that with a set of rules and practices that would regulate interconnection terms amongst telecommunications companies for decades while ensuring there were adequate incentives to compete — and not just on price — but on investment in infrastructure.

…If those in the US are not as familiar with this, it is because the US has not adopted the regulatory stance advocated by Tirole. Want to know why there is so little competition in telecommunications and broadband service in the US [as David Cay Johnston insisted to Paul Solman on the NewsHour]? go open one of Tirole’s books; it is time you listened.

Now that oligopolies transcend borders, Tirole said Monday he’s glad to see cooperation between authorities that regulate competition, from the United States and European Union, for example. In fact, as Tirole’s prize was being announced Monday, American and British regulators were coming together in Arlington, Va., for their first “war games” to practice preparing for a hypothetical, cross-border bank failure.

Tirole received degrees in engineering from École Polytechnique and École Nationale des Ponts et Chaussées in Paris and in mathematics from Université Paris-Dauphine. He earned his Ph.D. in economics from MIT in 1981.

Eighty-five percent of all economic laureates have been American, as were last year’s winners, Eugene Fama, Lars Peter Hansen and Robert Shiller, who won for their competing work on financial markets.

Watch Paul Solman’s interview with Shiller about winning the prize:

And for amusement, “stand-up economist” Yoram Bauman on the curious experiences of other economists when learning that they’d won the prize.

Finally, more links to information about Tirole and his work:

The Council on Foreign Relations has gathered his papers on regulation as it relates to climate change, electricity and the environment.

Why Google and Facebook are free, or one Tirole paper “every Internet user should know,” from Vox.

Bloomberg TV interview with Tirole: “Tirole Wants Tough Rules for Big Banks.”

Follow Tirole’s newly created Twitter account and read his first tweet (in French) that the prize wasn’t something he was counting on.

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