The Nobel Prize

James A. Mirrlees (b. 1936)


James Mirrlees was born in 1936 in Minnigaff, a small village near Newton Stewart in the southwest of Scotland. As a child he was studious and his parents encouraged him to be academically competitive. Mirrlees found he had a vocation for mathematics and through a diet of self-development, and with the help of his teachers, he excelled to the extent that he was entered for a Cambridge University scholarship. Unfortunately, at the time of the examination he was languishing in hospital with a serious illness and consequently he began his undergraduate career at Edinburgh University rather than Cambridge (Nobel Foundation, 2004). He was awarded an MA in mathematics and natural philosophy by Edinburgh in 1957.

Having by now taken and been successful in the Cambridge scholarship examination he had missed, Mirrlees left Scotland to enrol on a second undergraduate degree. At Cambridge he passed Parts II and III of the Mathematical Tripos in 1957 and 1958, respectively; his experience at Edinburgh meant that Part I was waived. It was at this point that Mirrlees decided that he wanted to do economics, despite having the option to go on to do research in mathematics. Why economics? ‘because I kept discussing it with economist friends, and they didn’t make sense to me; and because poverty in what were then called the underdeveloped countries, seemed to me what really mattered in the world, and that meant economics’ (Nobel Foundation, 2004). Mirrlees is another of the more than a few Nobel Laureates drawn to economics out of a desire for wider economic progress and social justice.

With an award to support a PhD, Mirrlees began to study economics. Perhaps, at first, he found the subject a little trickier than mathematics: ‘Economics takes a while to learn, even if much of it is in a way quite simple. It is simple to be wrong as well as to be right, and it is none too easy to distinguish between them’ (Nobel Foundation, 2004). He was also advised to read Keynes’s General Theory. In his highly entertaining (as in laugh-out-loud) Nobel autobiography, Mirrlees reflects: ‘That may not have been the best advice, but it did no great harm and one day I hope to finish it’. He was awarded a PhD in economics by Cambridge in 1963. One of his supervisors was Richard Stone, Nobel Laureate in 1984, and one of his examiners was a visitor to the university: Kenneth Arrow, Nobel Laureate in 1972.

Although he had a short spell as research assistant to Nicholas Kaldor that led to his first publication (Kaldor and Mirrlees, 1962), Mirrlees’s CV records his first academic appointment as adviser with the Massachusetts Institute of Technology (MIT) Center for International Studies in New Delhi, India from 1962 to 1963. In 1963 he received unsolicited job offers from both Cambridge and Oxford universities: ‘It seems ridiculous but I have never had a job I applied for. When I do apply, I don’t get it, but that is a small sample’ (Nobel Foundation, 2004).

Mirrlees took up the offer from Cambridge where he was assistant lecturer, then lecturer, and Fellow of Trinity College from 1963 to 1968. During this period he also acted intermittently as adviser at the Pakistan Institute of Development Economics in Karachi. In 1968, after a sabbatical as visiting professor at MIT, he moved to Oxford as Edgeworth Professor of Economics and Fellow of Nuffield College. Mirrlees stayed at Oxford until 1995, though he held visiting professorships at the University of California at Berkeley in 1986 and Yale University in 1989. In 1995 he returned to Cambridge as Professor of Political Economy and Fellow of Trinity College.

 In 1996, Mirrlees was awarded the Nobel Memorial Prize in Economics jointly with William Vickrey ‘for their fundamental contributions to the economic theory of incentives under asymmetric information’ (Nobel Foundation, 2004).

In his explorations of the role of incentives in the context of asymmetric information, Mirrlees has made path-breaking advances in two specific areas: the analysis of optimal income taxation, and principal–agent contract design. Moreover, these contributions have had a deep – even revolutionary – influence on the economic understanding of both public finance and incentives (Sandmo, 1999). Indeed, some have even gone so far as to suggest that Mirrlees has had as profound an impact on microeconomics as Albert Einstein had on physics (as reported in Dixit and Besley, 1997). How the cheerfully self-deprecating Mirrlees (as he appears in his Nobel autobiography) would react to this paean, the present authors are uncertain.

Economists have long been aware of the distorting effects of redistributive taxation: for example, high marginal income tax rates may well enable governments to promote equity but, given their adverse influence on the incentive to work, they are likely to reduce efficiency. In the mid-1940s, Vickrey attempted to model this problem as conditioned by the presence of asymmetric information: in this instance, that the productivity of individuals is known to them but not the government. How then can the government design an optimum income tax policy when it is ignorant of the economic capabilities of those it wishes to tax and where policy will affect how such capabilities are deployed? Although Vickrey was able to formulate the problem, its complexity defied solution. It was Mirrlees (1971a) who eventually made the breakthrough, and in so doing ‘established a paradigm for analysing a broad spectrum of economic issues where asymmetric information is a prime component’ (Royal Swedish Academy of Sciences, 1997, p. 174).

Mirrlees approached the problem by thinking about the individual’s labour supply decision in relation to the income it generated and the consumption this allowed. His purpose was to capture a set of ‘incentive-compatible’ allocations of work and consumption within which the more productive individuals would work harder by supplying more labour because – even though their consumption might not increase in proportion to their effort and income – they still had a material incentive to do so. On the assumption that more productive people – with higher wage rates – could always generate more income more easily through work than the less productive, Mirrlees demonstrated that a ‘full characterization of incentive- compatible allocations’ emerged (Mirrlees, 1997, p. 1317). He was then able to approach the income tax question by understanding the difference between income and consumption as a tax (Dixit and Besley, 1997).

That incentive-compatible allocations emerge is a result of what is known as the single-crossing property.16 This ensures that given appropriate incentives, people will in their choices of labour supply, income and consumption, reveal private information about their productivity. In other words, income tax schedules can be designed so that individuals are not tempted to falsely present themselves as lower productivity ‘types’ because the tax implications of higher productivity – and more work – are perceived to be too severe (Dixit and Besley, 1997; Royal Swedish Academy of Sciences, 1997; Sandmo, 1999).

As noted, a second path-breaking advance to be recognised by the Royal Swedish Academy is Mirrlees’s analysis of principal– agent contract design in the context of moral hazard. Mirrlees characterises the principal–agent relationship as less about information asymmetries and more about ‘the asymmetry of responsibilities, with the principal moving first, and the agent following’ (Mirrlees, 1997, p. 1328). He has shown that optimal incentive design by the principal must take into account the costs associated with incentives, and that such costs will be lower the more sensitive is the agent to penalties and the more discernible the agent’s effort in relation to outcomes for which he or she is responsible (Royal Swedish Academy of Sciences, 1997; Sandmo, 1999). The relevant references here are Mirrlees (1974a; 1976).

Other notable contributions highlighted in Mirrlees’s Nobel citation include, with Peter Diamond, an analysis of commodity taxes (Diamond and Mirrlees, 1971b; 1971c).17 This concludes that, to facilitate productive efficiency, taxes should be levied at the consumption stage rather than on factors of production, and that small countries should eschew tariff protection (Dixit and Besley, 1997). With Ian Little, Mirrlees has also published work on project appraisal in developing countries. Their book (Little and Mirrlees,1974b) has had a ‘significant impact’ on the development activities of agencies such as the World Bank (Dixit and Besley, 1997, p. 233).

Main Published Works
(1962), ‘A New Model of Economic Growth’ (with N. Kaldor), Review of Economic Studies, 29, June, pp. 174–92.
(1971a), ‘An Exploration in the Theory of Optimum Income Taxation’, Review of Economic Studies, 38, April, pp. 175–208.
(1971b), ‘Optimal Taxation and Public Production I’ (with P.A. Diamond), American Economic Review, 61, March, pp. 8–27.
(1971c), ‘Optimal Taxation and Public Production II’ (with P.A. Diamond), American Economic Review, 61, June, pp. 261–78.
(1974a), ‘Notes on Welfare Economics, Information and Uncertainty’, in M. Balch, D. McFadden and S. Wu (eds), Essays in Equilibrium Behaviour Under Uncertainty, Amsterdam: North-Holland, pp. 243–61.
(1974b), Project Appraisal and Planning for Developing Countries (with I.M.D. Little), London: Heinemann Educational Books.
(1976), ‘The Optimal Structure of Incentives and Authority within an Organization’, Bell Journal of Economics, 7, Spring, pp. 105–31.
(1997), ‘Information and Incentives: The Economics of Carrots and Sticks’, Economic Journal, 107, September, pp. 1311–29.

Secondary Literature
Dixit, A. and T. Besley (1997), ‘James Mirrlees’ Contributions to the Theory of Information and Incentives’, Scandinavian Journal of Economics, 99 (2), pp. 207–35.
Royal Swedish Academy of Sciences (1997), ‘The Nobel Memorial Prize in Economics 1996’, Scandinavian Journal of Economics, 99 (2), pp. 173–7.
Sandmo, A. (1999), ‘Asymmetric Information and Public Economics: The Mirrlees–Vickrey Nobel Prize’, Journal of Economic Perspectives, 13, Winter, pp. 165–80.
Post a Comment