Tirole and Pasteur

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citationsThere are lots of criteria that we use to think about why someone should win a Nobel prize. There is creative genius, there are pioneering findings but, in reality, the dominant criteria is impact. The tough issue is usually “impact on what?” Because being at the frontier is difficult, most specialise in their impact. To be sure, someone is going to try and explain in a press release why dynamic stochastic general equilibrium theory helps the economy or mechanism design has impacted on productivity but, in reality, like the contributions of Einstein, if there is a broader impact from frontier ideas it is usually carried out by others in the relatively far future. Which is the reason, by the way, that many Nobel prize winners in economics tend to be older.

The rarer case, however, is the economist who is more like Louis Pasteur. Pasteur, famously, founded the field of microbiology and with it vaccination: A fundamental advance in science alongside an incredible invention that impacts directly on people. Donald Stokes, the famed historian of Science, liked to think of scientist impact as having two dimensions: academic and applied. When an idea managed to have impact on both fronts, he termed in Pasteur’s Quadrant.

It is safe to say that it would be hard to find a Nobel prize winning economist in the last decade that so squarely falls into Pasteur’s Quadrant than Jean Tirole, this year’s winner. Let’s start with the academic dimension. His work has been cited 80,000 times (let me check the number of zeros on that; yep that’s right) and so regularly tops the list of economists likely to win a Nobel prize on that dimension alone. This includes an H-index of 115. Others will no doubt discuss this impact. For me, if there is a single person who has most inspired my research over my career, it is Tirole. My quick count this morning indicated that half of my over 100 academic publications would not exist but for a Jean Tirole paper.

But let me turn to the other dimension: applied impact. There are many economists who have applied impact following their more academic work (auction theory is an obvious example). There are other economists who have applied or broader impact because they engage in policy advice or consulting. But there are very few who have it because their academic work contains both fundamental advances and the broader impact in one. And that is Jean Tirole. His work on regulation has influenced virtually all price and non-price regulation of firms with market power for two decades. It was not simply because he used information economics to understand regulation. Instead, he was there thinking about these problems as they arose and literally wrote the book on those issues.

Perhaps the most fundamental was his work on multi-sided markets or network markets. In the 1980s and early 1990s, Tirole had started out — along with Jean-Jacques Laffont (who surely would be sharing the prize today had he not passed away at too early an age) — looking at the regulation of public utilities and, for the first time, providing the rationale for why Ramsey pricing should be used as these were often multi-product firms — or at least multi-objective ones. But the deregulation of telecommunications changed everything. This was a network industry and this meant that competing firms would also have to have a layer of cooperation amongst them in order to allow any-to-any connectivity. But we know that if you leave firms to come up with the terms of the cooperation themselves, they are going to find a way to remove the competitive parts as well. Regulators did not understand that before Tirole. To be sure, there was nervousness but before then there were no rules as to how to deal with it. Tirole solved that with a set of rules and practices that would regulate interconnection terms amongst telecommunications companies for decades while ensuring there were adequate incentives to compete — and not just on price — but on investment in infrastructure.

If those in the US are not as familiar with this, it is because the US has not adopted the regulatory stance advocated by Tirole. Want to know why there is so little competition in telecommunications and broadband service in the US? go open one of Tirole’s books; it is time you listened.

This worked evolved in many directions. Tirole (along with Jean-Charles Rochet) took on credit cards which, as a side note, founded the most important applied theory field in industrial organisation in the last decade: the theory of two-sided markets. Tirole (along with Mathius Dewatripont and Bengt Holmstrom) a decade ago, anticipated the financial crisis, and developed the foundation for the rules of the regulation of liquidity and risk. Today, Tirole (along with Josh Lerner) has shown the way in how to think about patent pools and standards-essential patents — showing that we can have cooperation and competition in innovation at the same time. This stuff finds its way directly into practice. It is literally written in legislation.

Finally, I’d like to end on a personal note. Jean Tirole has always been extremely generous to others and me in particular. He has offered advice and goes out of his way to promote, cite and acknowledge the contributions of others. Jean is an incredibly nice guy. But he has also had a third impact that is hard to under-state. I didn’t study industrial organisation or regulation when I was at Stanford doing my PhD (well, at least, not in any broad way). But within a few years of graduating it was my field. This is because I was reacting to policy issues around me in Australia. And when I had to learn about those issues to get up to speed, Jean Tirole had book after book waiting for me. His textbooks dominate microeconomics. We know it but rarely reflect on it. He taught me The Theory of Industrial Organization, A Theory of Incentives in Regulation and Procurement, Game Theory, The Theory of Corporate Finance, The Prudential Regulation of Banks, Competition in Telecommunications, and many more. I have a whole shelf of this. And not a decorative shelf. I have lived these books. Worn them down. In graduate school, another student once said that his thesis would be providing the even numbered solutions to Tirole. I’m no longer sure which book he has referring to. But we knew that regardless that would be a PhD worthy achievement.

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