Many times the Nobel Prizes for Economics came with controversies and dissatisfactions. A classic example of the same was when in 1977, eminent economist Gunnar Myrdal expressed his desire for the prizes for Economics to be scrapped, as he thought that Economics was a ‘soft science’, which meant that it was a branch of science loaded with social and political values, unlike ‘hard sciences’ such as physics and chemistry.
This year, too, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, popularly known as the Nobel Prize for Economics, did not escape. Awarded to Stanford professors Dr. Paul Milgrom and Dr. Robert Wilson for their work in auction theory and developing new models of an auction, the criticism was led by Branko Milanovic, the Serbian-American economist, who had tweeted that Economics is a “social science”, and thus should be used to increase the material gain of the people and make their lives better by working on poverty, inequality, and wealth. Thus, he argued that only those efforts that try to do the same should be appreciated and awarded, and not any other minor contributions such as designing how to conduct an auction.
But one thing he missed out is that auctions have been there for a very long time, and have been helping people divide resources more effectively. While we might think of auctions to just involve precious gems, jewellery, and artworks, the concept of auctions has been extended to effectively sell other resources, such as minerals, oil, treasury bills, and bandwidth. These have macroeconomic implications. For example, auctioning treasury bills, through open market operations (OPO’s) is still used as an instrument by the central bank to reduce the money supply in the economy and reduce inflation rates.
In fact, in a time when there is an increasing awareness about climate change and ways to mitigate its effects, Robin Mason, Professor of Economics and Pro-Vice-Chancellor (International) of the University of Birmingham, notes that auctioning the rights to emit carbon emissions to different sectors of the economy will help reduce carbon gas emissions. A paperpublished by the Centre for Clean Air Policy made a case for the same back in 1998 by posing the following arguments: first, the paper argues that auctioning will make way for efficient revenue generation by not creating dead-weight losses which would occur if other means such as taxation were implemented to cut carbon emissions.
Secondly, it argues that through the auctioning method, there will be an incentive for innovation as firms will benefit from the decreasing prices of the allowances and the decreasing abatement costs. This is because there will be a decreasing trend in the value placed by these firms over these allowances as they keep innovating and increase revenues while decreasing carbon emissions.
Thirdly, auctions also make sure that the highest bidder pays for the allowances, and that adds revenue to the government which it can invest to create schemes and policies that can help the public, and also reduce carbon emissions.
Finally, auctions reduce the influence of the bureaucracy and the government and save their time, because it will not be necessary for them to conduct re-evaluations of these sectors frequently and either reduce or increase the allowances accordingly, reducing paperwork and political interferences, thus, making them focus on other important aspects of governance. This is just one perspective that would say that auctions are beneficial from a public policy perspective. If the same was adopted for other policy decisions too, it would make the government more efficient in distributing scarce, natural resources having alternative uses to economic agents who have different, never-ending wants — thus, efficiently trying to solve one of the biggest questions the field of economics always tries to answer. This statement, though, comes with a catch.
For auctions to be efficient, they should be modelled well so that both the bidders and the auctioneers are benefitted. This is where the work of this year’s Nobel Prize winners come to the forefront. Paul Milgrom and Robert Wilsonanalyzed different auction formats such as the English auction format (the widely used format, where bids increase in ascending order and the highest bidder wins), the Dutch auction format (where bids keep decreasing, and the lowest bid wins) and the Vickrey auction format (where the bids keep increasing and the highest bidder wins but pays the second-highest amount), and concluded that bidders care more about not being subjected to the ‘winner’s curse’, where the highest bidder wins the commodity but pays more than the actual worth of that commodity, eventually leading to losses. While Dr. Wilson theorized that this apprehension can be overcome if more information about the bids, the commodity, and the process were shared by the sellers with the bidders, Dr. Milgrom also added that different auctioning formats have an impact on the revenues earned by the sellers. They both are also popularly known to have developed another model of auctions, called theSimultaneous Multiple Round Auction (SMRA), which is an extension of the English model of auctions, where multiple objects are simultaneously bid in different rounds, and the highest bidder of a specific object(s) wins. First developed for the US Federal Communications Commission, it was then adopted and used by many governments across the world.
Auctions, if modelled well, could earn millions for sellers and governments. It helps the government earn a lot of revenue and become efficient, thus, having macroeconomic policy implications too. For this, the theoretical traditions of auctions, starting from William Vickery to Paul Milgrom and Robert Wilson, become necessary. Their contributions are important, and the Nobel Prize was well deserved by them.
Siddharth G is a second-year undergraduate student studying Economics and Political Science at Ashoka University.