The Nobel committee narrowed down the contributions of Tirole to regulatory economics for the prize. He is much more than that
Jean Tirole is one of the most prolific economists alive today. His work is grounded in microeconomics but spans a huge array of applications—from advertising to industrial organization (the study of different kinds of firms: monopoly and oligopoly) to game theory to regulatory economics.
That is not all.
Economists have traditionally shied away from theorizing about finance. Tirole broke that barrier as well. His 2006 book, The Theory of Corporate Finance, is a landmark in the study of finance from an economist’s perspective.
He also boasts two very successful economics textbooks, Game Theory (co-authored with Drew Fudenberg) and Industrial Organization. Both books are classics in their area and are part of bread-and-butter courses across the world.
The committee deciding the prize chose to highlight Tirole’s contributions in taming monopoly power and regulatory economics. These have been subjects of economic and political interest since the global economic and financial crisis began in 2008. That crisis was in essence a regulatory crisis: firms became too big to fail and regulators did very little (or were allowed to do little).
Although concentrated in the financial sector, the general principles outlined by Tirole and his late colleague Jean-Jacques Laffont, show how regulated firms respond to incentives created by regulators and how, in turn, regulators can themselves have perverse incentives to ask for more out of the firms in their grip.
The “ratchet effect" whereby a regulator may force a regulated firm to part with ever increasing amounts of the firm’s surplus to the point it is extinguished illustrates the point of regulatory overkill.
If one were to cite five papers by Tirole that capture the flavour of his manifold achievements these are:
1) The Politician and the Judge: Accountability in Government (co-authored with another Nobel laureate, Eric Maskin). The American Economic Review, September 2004. (On the pitfalls of either greatly empowering public officials or empowering them too little).
2) The Fat-Cat Effect, The Puppy-Dog Ploy, and the Lean and Hungry Look (co-authored with Drew Fudenberg) The American Economic Review, May 1984 (On how strategic considerations determine investment choices of firms).
3) Belief in a Just World and Redistributive Politics (co-authored with Roland Benabou). The Quarterly Journal of Economics, May 2006 (A phenomenal paper on the microeconomics of political and economic beliefs. A careful study of how ideas about inequality and free markets are created in individuals long before Thomas Piketty made the subject famous).
4) Understanding Rent Dissipation: On the Use of Game Theory in Industrial Organization (co-authored with Drew Fudenberg) The American Economic Review, May 1987 (A nine-page tour de force of using game theory to understand rent formation and dissipation in monopolies, adoption of technology and races to create patents).
5) The Internal Organization of Government. Oxford Economic Papers, January 1994. (On why and what governments do; the many conflicting demands on governments and why it is unfair to blame them as being inefficient).
In 1921, another Nobel committee awarded Albert Einstein the physics prize for his discovery of the photoelectric effect, ignoring his far-reaching study of relativity.
The committee that decided the prize for Tirole has not been unfair in that way. But it narrowed down the contributions of this talented economist to regulatory economics for the prize. Tirole is much more than that: he belongs among a handful of economists who have written phenomenal papers in almost all reaches of microeconomics and formal political economy.