1996 Economics Nobel Laureate Professor James Mirrlees
Came to NTU to Talk About
“When will the Chinese Economics Grow More Slowly?”
The NTU College of Social Sciences, in collaboration with the NTU Center for China Studies, held a special lecture on October 9th in the College of Public Health. The topic of the lecture was “When will the Chinese Economics grow more slowly?”, and the speaker was the 1996 Nobel laureate in economics Professor Sir James Mirrlees. Faculty, students, the media, and dignitaries from all circles gathered to listen to the master talk about “the economic theory of incentives under asymmetric information….”
James A. Mirrlees obtained his doctorate degree in economics from Cambridge University in 1963. He taught at Cambridge from 1963 to 1968, then he was an Edgeworth chair professor at Oxford from 1968 to 1995, and in 1995, he returned to teach at Cambridge till now. Owing to his contributions to the theoretical studies of incentives under asymmetric information, he received the Nobel Prize in economics with Professor William Vickrey of Columbia University.
In recent years, the study of asymmetric information has become one of the most important areas in economic theory. We often observed a situation in which different decision-makers have different kinds of information. For instance, a bank cannot fully grasp the future income of a loan applicant; shareholders of a corporation do not understand the costs and competitive conditions as well as those who actually run it; and when a government designs its income tax system, it has little knowledge of the taxpayers’ productivity and actual income. Because these information are asymmetric, the side that has access to more information will often make use of this advantage to gain the maximum amount of profit, resulting in the inefficiency of the society.
In a classical thesis published in 1987, Francis Edgeworth proposed a radical progressive income tax system to eliminate the gap in people’s incomes. Professor Vickrey, in his studies in the 40’s, maintained that the design of an income tax system should take into consideration two factors: a person’s working incentive, and the government’s asymmetric information towards an individual’s productivity, as a progressive income tax system often affects a person’s incentive to work hard. Although Professor Vickrey proposed a basic way to solve this thorny problem, but the mathematical techniques required by his model were quite complex, so he was not able to bring his proposal into fruition. It was not until a quarter of a century later, that Professor Mirrlees was able to solve this problem completely. He proposed a single crossing and sorting condition, which greatly simplified the problem and solved it. In the process of solving the problem, Professor Mirrlees also developed a far-reaching disclosure principle (the revelation principle). According to this principle, all the mechanisms that could solve the issue of incentives under asymmetric information would have the following nature: that the design of the mechanism would persuade an individual to divulge his/her personal information, and that such an act of revelation would not constitute a conflict with his/her self interest. In essence, Professor Mirrlees’ breakthrough research in this area not only solved the issue of optimal taxation, the model which he established became the paradigm for theoretical analysis in many economic issues that were centered around asymmetric information.
In all studies pertaining to asymmetric information, the most typical problem is the issue of moral hazard. In a bilateral relationship, if the result of an event can be observed by both parties, and if the
result could be affected by any partys’ unilateral acts or random variables, and the other party cannot
directly observe such acts, then the acting party would be liable for moral hazard. Take, for example, the relations between shareholders(A) and the management. (B) Both the shareholders and the management could observe the profits of company, which are contingent upon the management’s efforts, its ability, and other uncontrollable random variables. Therefore, the shareholders cannot determine whether the current performance should be attributed to the management’s efforts or
to the external environment. So, the management has reasons to default on their duties, and a moral hazard is formed. For this issue, Professor Mirrlees also had ground-breaking insights. From the above example, although the profits engendered by the management’s efforts could be affected by random factors, to the extent that the shareholders cannot determine the management’s contribution, but overall the management’s behavior had already decided the probability of occurrence of various possible outcomes, so we can design an appropriate reward/punishment mechanism in accordance with the probabilities of occurrence. In that sense, the benefits for the management are concurrent with the benefits of the shareholders. In other words, when the management is pursuing the greatest benefits for themselves, they are also pursuing the greatest benefits for the shareholders. This is the typical “principal/agent” problem, Professor Mirrlees’ research in this area established him as the pioneer for many follow-up studies.
In addition to the above-mentioned achievements, Professor Mirrlees made outstanding contributions to other areas of economics. When he did research with an American scholar named Peter Diamond on the structure of consumption tax, he espoused the idea that under fairly normal conditions, it would be worthwhile to maintain production efficiency. Specifically speaking, small and open economy should not impose tariffs on international trade; as regards taxes for labor and capital which were elements of production, the taxes should be levied in the consumption phase, rather than during the production process. The latter conclusion was a source of inspiration in the formulation and evaluation of economic policies for developing nations. In addition, according to his research achievements with another British economist named Ian and with Peter Diamond, Professor Mirrlees was able to independently establish the important criteria for the assessment of development
Additionally, Professor Mirrlees had great achievements in economic growth and development. He and Stern wrote a book called “Models of Economic Growth,” and he wrote “Project appraisal and planning for developing countries” with Little. In 1975, he published a treatise entitled “A pure theory of underdeveloped economies, using a relationship between consumption and productivity” which
did an utilitarian analysis on economic policies, and especially on the growth theory, and explored the influence of uncertainly on moderate growth. He was the inventor of non-renewable resource
theory, the integral growth theory, the irreplaceable theorem for durable goods, etc. In the area of economic development, he proposed the cost/benefit analysis method, established the development model for low-income economies, and studied the effectiveness of international aid policy and results.
In conclusion, besides his contribution to the “principal-agent” theory, Professor Mirrlees also achieved distinction in optimal tax structure, the best contract design under asymmetric information, public finance theory, and welfare economics theory under uncertainty, etc., he has become the representative figure in these areas.