20 October 2010

Three share Nobel in Economic sciences for 2010

Economic sciences Nobel for 2010 is shared by Peter Diamond, Dale Mortensen and and Christopher Pissarides "for their analysis of markets with search frictions."

Peter Diamond, Dale Mortertensen and Christopher Pissarides are the three Nobel laureates of Economic Sciences 2010 "for their analysis of markets with search frictions". © Nobel Foundation
On the one hand, a lot of people are unemployed and on the other hand, there are a number of job vacancies. This gap is on account of search frictions and the work by Peter A. Diamond, Massachusetts Institute of Technology, Cambridge, United States, Dale T. Mortensen, Northwestern University, Evanston, Illinois, United States, and and Christopher Pissarides, London School of Economics and Political Science, United Kingdom, is to address this labour market problem, but the theory is also applicable to other markets.

Peter Diamond is well known for his contributions to growth, social security, public finance, economic of uncertainty and economic dynamics and search (see 'An Interview with Peter Diamond' by Giuseppe Moscarini, Macroeconomic Dynamics, 11, 2007, 543-565). It is his work on search and breach of contract that gave him this Nobel. Some of his co-authors who have already received Nobel in economic sciences are Tjalling C. Koopmans (1975), James Mirrless (1996), Daniel McFadden (2000), Joseph E. Stiglitz (2001) and Eric Maskin (2007).

Dale Mortensen has applied the search theory to labour market. His short bio, refers to

"His insight, that friction is equivalent to the random arrival of trading partners, has become the leading technique for analysis of labor markets and the effects of labor market policy." In fact, Mortensen's work "n the optimal labor contract with a Poisson process of changes in the environment" did have an impact on Peter Diamond also (see above mentioned interview).

Christopher Pissarides biographical note indicates that his work are on the economics of unemployment and theory and policy in the labour market. He has co-authored a good review on this subject 'Looking into the black box: a survey of the matching function', Journal of Economic Literature, 39, 2001, 390-431. He has already shared with Dale Mortensen the 2005 IZA prise in labour economics for their work on unemployment.

The Nobel press release suggests that generous unemployment benefits would lead to greater unemployment and longer search time. The search theory has been applied to housing market - variation in sales over time, time to find a buyer and agreement by the parties on a price. "Search has also been used to study questions related to monetary theory, public economics, financial economics, regional economics, and family economics."

For the lay public, search friction can also be explained by visualizing a barter economy. Peter wants to sell diamonds to buy ale, Mortensen wants to sell ale but in return he want to get a horse ride. Now if both have to transact then they have to search for a third person, say, Christopher who wants to give a horse ride to get diamonds. To wit, Christopher Pissa-rides to glory, Mortensen toasts D-ale and Peter shares his diamond for the Nobel economic sciences 2010 because of search frictions.

(This write-up was first put up in Digital Journal, 11 October 2010, http://www.digitaljournal.com/article/298785)

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