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Nobel Prize in Economics

Picture of Jean Tirole

The Nobel in Economics this year went to the dapper Frenchman pictured here, Jean Tirole, a member of the Toulouse School of Economics, and with the Institut d'Economie Industrielle (IDEI). In fact, he chairs the board of directors of IDEI.

Nonetheless, if you are an Anglophone, even if you are reasonably well informed about contemporary academic economics, the odds are good you've never heard of him.

Which is just as well. The selection of a more widely-known figure, Krugman, Kahneman, Mundell, to take recent examples, doesn't really teach us anything. The selection of Tirole naturally leads some of us to wonder why, and so to teach ourselves something. In that teaching-moment respect, the choice is akin to that of Elinor Ostrom a few years back.

Tyler Cowen got the goods, collecting a lot of material about Tirole quickly and effectively on his blog on the morning of the announcement.

About a third of third of the way down Cowen's blog piece, this caught my eye, "He has written some key papers on financial intermediation, collateral, and the agency problems associated with lending." As you might gather from that, he is an analytic numbers-crunching kind of economist, not one of the ideological warriors in the field.

Cowen also links us to a paper Tirole co-authored back in 1997 on financial intermediation. The short version: they worked out a model of intermediation that makes predictions about the consequences of collateral squeezes, a credit crunch, or a savings squeeze.

Through the website that the Royal Swedish Academy of Sciences devotes to these awards you can get a detailed 54-page discussion of the bases for honoring Tirole. You get to those financial intermediaries at the bottom of page 36. By page 39 the authors are describing the "Holmstrom-Tirole model" outlined in that '97 paper as "a workhorse for analyzing issues in financial intermediation as well as corporate finance."

Operating firms, the "real economy" widget manufacturers of the world, can ensure their liquidity in the event of a future crisis by hoarding lots of funds. But, as Holmstrom and Tirole understood, there are inefficiencies inherent in such hoarding. It is much more efficient to have a credit line with a bank. Thus, the buffering role of intermediation.  Yet there must be enough liquidity in the intermediates. Thus, H&T argue, there is a positive role for the public sector, for government Treasuries and central banks.

Tirole has also written about asset-price bubbles: about when they are impossible and under what circumstances they are not only possible but rational and socially useful.

Further (again quoting to document from the Swedish Academy, he has "combined his early work on bubbles with his more recent work on financial regulation...."


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