"It is a real honor for Amherst," said President Tom Gerety, who noted that this was the third time an Amherst alumnus has won a Nobel Prize.
"He has boundless enthusiasm for economics and for thinking how it can be applied in new ways to new problems," said Professor of Economics Beth Yarbrough. "His research has maintained a focus on the economics of information, but the areas of application have moved with the times."
Stiglitz was awarded the prize for his analysis of markets with asymmetric information. Such a market is characterized by actors on one side of the market having much better information than actors on the other side. For example, potential clients know more about their accident risk than their insurance companies and managers know more about the firm's profitability than shareholders.
Stiglitz has made contributions about different markets and has shown that asymmetric information provides the key to understanding many market phenomena, such as unemployment and credit rationing.
Stiglitz shares the award with George Akerlof of the University of California at Berkeley and A. Michael Spence of Stanford University. In the 1970s, these three men laid the groundwork for a more general theory in markets with asymmetric information. Their research formed the heart of modern information economics and is widely applicable, ranging from traditional agricultural markets to modern financial ones.
Initially, the researchers were challenging the theory that unregulated markets function with perfect efficiency. Their findings suggested that government intervention might be necessary when markets fail. Stiglitz said that failure to understand the limits of market efficiency had "devastating effects" on developing countries.
"The simplistic models that prevailed in the past assumed that capitalist markets were just like any other market, like the market for steel. The analogy is a very dangerous one," Stiglitz said in a Royal Swedish Academy of Sciences press release. "The essence of capital markets is information."
Stiglitz currently holds professorships in the economics department and the graduate schools of business and international relations at Columbia University.
Professor of Economics in the Columbia School of Business Michael Riordan called Stiglitz "a leading figure in almost all fields of economics."
"Before this work was done, economists recognized that some markets didn't work, but they thought the main reason for market failure was monopoly and oligopoly," Riordan said. "Stiglitz and the other Nobel laureates showed markets could perform poorly if consumers has insufficient information about products."
Stiglitz has also worked outside of the academic realm. He was chairman of President Bill Clinton's Council of Economic Policy and was later named chief economist of the World Bank.