10.11.2001 - UC Berkeley professor shares 2001 Nobel Prize in economics, university's second win in a row

Berkeley - George A. Akerlof, an economics professor at the University of California, Berkeley, was named the 2001 co-winner of the Nobel Prize in economic sciences today (10/10/01). It is the second consecutive year in which the Nobel has gone to a UC Berkeley economist.

Akerlof, described by a colleague as "a citizen of the profession," is the author of a landmark study on the role of asymmetric information in the market for "lemon" used cars. His research broke with established economic theory in illustrating how markets malfunction when buyers and sellers - as seen in used car markets - operate under different information. The work has had far-reaching applications in such diverse areas as health insurance, financial markets and employment contracts.

Akerlof shares the prize with economists A. Michael Spence of Stanford University and Joseph E. Stiglitz of Columbia University for their contributions to the analyses of markets with asymmetric information.

Akerlof, 61, is UC Berkeley's 18th Nobel Prize winner. He is the university's fourth economics professor and the third in seven years at the university to be so honored. Economics professor Daniel McFadden shared the prize last year. The now-deceased John Harsanyi, a professor of economics and business administration, won the Nobel Prize in 1994; and Gerard Debreu, a professor emeritus of economics and mathematics, won the prize in 1983.

Since joining UC Berkeley's economics department in the College of Letters & Science as an assistant professor in 1966, Akerlof has been recognized for his research that borrows from sociology, psychology, anthropology and other fields to determine economic influences and outcomes. His areas of expertise include macroeconomics, poverty, family problems, crime, discrimination, monetary policy and German unification.

Akerlof is married to economist Janet L. Yellen, the Eugene and Catherine M. Trefethen Professor at UC Berkeley's Haas School of Business and professor of economics. Yellen served as chair of the President's Council of Economic Advisers from 1997 to 1999 and was a member of the Board of Governors of the Federal Reserve System. Akerlof and Yellen have worked together on numerous research projects. Their son Robert, 20, is a junior at Yale University. "He has real flashes of insight into human problems, into what may explain social phenomena," Yellen said. "It's wonderful to work with him; he's so original."

UC Berkeley colleague and fellow Nobelist McFadden said Akerlof’s receipt of the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel resulted from what amounted to a revolution in the understanding of what makes markets work, a revolution that was led by Akerlof. McFadden, who lives near Akerlof, dropped by to congratulate him in person early this morning.

"George Akerlof's Nobel prize is richly deserved," said McFadden. "He and his co-laureates led a revolution in our understanding of how markets behave when different participants have different information about the qualities of commodities being traded. He showed that in the absence of adequate mechanisms to assure quality and verify and enforce contract provisions regarding quality, markets may fail to form or may do a poor job of allocating resources. His work has profound implications for the organization and regulation of important real markets such as the labor market, the market for health insurance, and markets for financial commodities."

Akerlof's award today came as no surprise to many of his fellow economists at UC Berkeley and around the country.

"More than any other person in economics, George has worked to show how the insight from sociology and psychology could broaden, enrich and increase the power of economics. He is, in my opinion, perhaps the most imaginative and creative applier of insights from other disciplines," said Henry Aaron, senior fellow at the Brookings Institution.

"George Akerlof's contributions to economics have been fundamental, from his celebrated paper describing the role of asymmetric information between buyers and sellers in the market for 'lemons' to his work that helped launch the burgeoning field of behavioral economics," said Alan Auerbach, chairman of UC Berkeley's economics department. "All the while, he has made crucial contributions to macroeconomic theory, thereby demonstrating the extraordinary breadth of his interests."

Christina D. Romer, a colleague in the economics department at UC Berkeley, wrote in a 1996 evaluation of Akerlof's work that he was almost certainly destined to win a Nobel Prize. She praised his path-breaking work that incorporates psychological insights into models of economic behavior.

Also known as an outstanding professor, Akerlof earns teaching evaluations by his students that "are simply off the charts," Romer said. His commitment to the university, the economics department and his students "is legendary," Auerbach said.

"George is a kind generous, and enthusiastic person who loves economics," Romer said. "He contributes immeasurably to the department by simply being the kind of person he is."

The native of New Haven, Conn., developed a keen interest in economics as a child growing up in the shadow of the Great Depression of the 1930s, an era he called the "catastrophe that took over the world."

"I've always been interested in why people are poor," he said. "What economics is about is trying to prevent poverty insofar as that is possible."

Akerlof earned a bachelor's degree at Yale in 1962 and a PhD at the Massachusetts Institute of Technology in 1966. He is a Non-resident Senior Fellow at the Brookings Institution and a research associate of the Canadian Institute for Advanced Research. He also is one of five Richard and Rhoda Goldman Distinguished Professors in the College of Letters & Science, appointed in 1997 for five-year terms.

Additional awards he has received include a Guggenheim Fellowship, Fulbright Fellowship, Fellow of the Econometric Society and Fellow of the American Academy of Arts and Sciences. He served as senior staff economist with the Council of Economic Advisers from 1973-1974 and was visiting research economist in the special studies section of the Federal Reserve System Board of Governors from 1977 to 1978.

He is a former Cassel Professor of Economics with Respect to Money and Banking at the London School of Economics, and visiting professor at the Indian Statistical Institute in New Delhi.

In "An Economic Theorist's Book of Tales" (Cambridge University Press, 1984), Akerlof discussed his approach to his work. "Economic theorists, like French chefs in regard to food, have developed stylized models whose ingredients are limited by some unwritten rules," he wrote. "Just as traditional French cooking does not use seaweed or raw fish, so neoclassical models do not make assumptions derived from psychology, anthropology, or sociology. I disagree with any rules that limit the nature of the ingredients in economic models."