Frenchman Jean Tirole of the University of Toulouse won the 2014 Nobel Prize in Economic Sciences for his work on how governments can better regulate industries from banking to telecommunications.
Regulators can use Tirole’s research to encourage powerful companies to become more productive, while preventing them from harming competitors and customers, the Royal Swedish Academy of Sciences said in announcing the award.
“We are affected by big firms all the time,” said Tore Ellingsen, chairman of the judging committee and a professor at the Stockholm School of Economics. “The question is what sort of regulation and competition policies do we want to put in place so that large and mighty firms will act in society’s best interest.”
Tirole is the first Frenchman since 1988 to win the award and the first to be specifically recognized for work on regulation since 1982. The honor comes in the wake of a financial crisis that has been widely blamed on lax oversight of the banking industry.
Speaking by telephone to a press briefing in Stockholm, Tirole said regulation “has to be light enough not to kill entrepreneurship” yet a strong government is needed to enforce it.
Tirole told Bloomberg Television that “strong regulations” are needed to “prevent banks from gambling with taxpayer money.”
He commended regulators’ efforts to improve the liquidity of financial firms and limit their trading risks while saying it was too early to tell how effective governments will be in preventing another crisis.
Tirole “is part of the post-Chicago school of economics,” said Robert Litan, a senior fellow at the Brookings Institution in Washington, referring to the laissez-faire philosophy popularized by the University of Chicago. “He believes that markets don’t always work and worries about how to fix them.”
In particular, the Nobel winner “brought modern game theory tools to the question of how we could improve government regulation,” said Bengt Holmstrom, an economics professor at the Massachusetts Institute of Technology who co-wrote a book with Tirole in 2011 on liquidity in financial markets.
The Frenchman has been a champion of “incentive regulation” that encourages companies to be as efficient as they can while sharing some of the gains they make with consumers, Litan said
Tirole’s work is the “foundation for much of the incentive regulations that have been adopted over the last 25 years across the world,” said Nancy Rose, a professor at MIT and deputy assistant attorney general in the antitrust division at the Department of Justice in Washington. That approach is particularly used to regulate the electric power and telecommunication industries.
Tirole first trained to be an engineer in France and went on to get a doctorate in mathematics from the University Paris-Dauphine in 1978 and a second doctorate in economics from MIT in 1981.
The recognition the prize carries has helped previous winners bring their economic theories closer to policy making. Past laureates include Milton Friedman, James Tobin and Friedrich August von Hayek. The prize also carries an award of $1.1 million.
