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Joseph E. Stiglitz, born in Gary, Indiana, received his PhD from the Massachusetts Institute of Technology in 1967. A winner of the John Bates Clark Award for young economists, he has taught at Yale, Princeton, Stanford, MIT, Oxford, and Columbia University. In 1986 he founded the Journal of Economic Perspectives. In 2001 he was awarded the Nobel Prize in economics.
Stiglitz’s initial academic output, including his first two published articles in 1967, focused on how economic growth is affected by investment, risk, and income and wealth levels. In the early 1970s he and Michael Rothschild developed important insights into the nature of risk in financial and insurance markets. By the mid-1970s he was exploring problems of exhaustible natural resources, sharecropping, efficiency wages, and discrimination, even while looking more deeply into the nature of information and risk in insurance and financial markets.
Working simultaneously on theoretical problems and on applied issues led Stiglitz to his breakthrough insight regarding the importance for economics of imperfect information, a term Stiglitz first used in two 1976 papers. As discussed by Stiglitz and Andrew Weiss in their 1981 article, this notion, sometimes denoted asymmetric information, refers to situations in which some participants in a market know more than others and can use their informational advantage to affect the efficiency of market outcomes. This informational advantage is often held by “agents” who hope to contract with “principals” controlling scarce resources—for example, applicants seeking jobs from potential employers and prospective borrowers seeking credit from lenders. Principals can then often best achieve their goals by supplying fewer loans (or fewer jobs) than are demanded. As Stiglitz argued in his 1987 article, prices are not in these cases permitted to rise to levels at which demand equals supply; indeed, in these models the quality of the commodity traded (the productivity of workers or default level of borrowers) depends on price. Their profits are often largest at a “rationing equilibrium”—a price wherein the quantity that agents seek to buy (or sell) exceeds the quantity that the principal supplies (or buys). At rationing equilibria, market forces will generally not equalize supply and demand.
These insights generated what Stiglitz calls the economics of information, which explores the consequences of information asymmetries in credit, financial, product, and labor market. New information-based paradigms have been developed in development economics, trade theory, and other fields; and information-based models have been central to the emergence of the microfoundational “New Keynesian” (named for the preeminent economist John Maynard Keynes) approach to macroeconomics.
The economics of information suggests that selective government interventions and/or nonmarket institutions can enhance growth and reduce poverty. Stiglitz became increasingly involved in the policy implications of these ideas, triggered by an extended period in public service. He served on the Clinton administration’s Council of Economic Advisers from 1993 to 1997, the last two years as chair. He then became chief economist and senior vice-president of the World Bank from 1997 to 2000. While at the World Bank, he publicly challenged the so-called Washington Consensus, that is, the then-prevailing practice at the World Bank and International Monetary Fund of using full-information, competitive-economy models to understand global and developing-country economic outcomes. In Stiglitz’s view, more realistic models would show that global economic forces have often jeopardized viable local governmental and institutional economic arrangements. Amid considerable controversy, as Ha-Joon Chang notes in his 2001 book, the World Bank made some changes in its modeling and policy approaches. Stiglitz tells his side of the story in his bestselling 2002 book, Globalization and Its Discontents.
Two articles summarizing Stiglitz’s work in light of his Nobel prize are Chang’s (2002) and J. Barkley Rosser’s (2003); Stiglitz’s own summary of his ideas and their implications for the change in the economics paradigm appears in his 2003 and 2004 articles.
Bibliography:
- Chang, Ha-Joon, ed. 2001. Joseph Stiglitz and the World Bank: The Rebel Within. London: Anthem Press.
- Chang, Ha-Joon. 2002. The Stiglitz Contribution. Challenge 45 (2): 77–96.
- Rosser, J. Barkley, Jr. 2003. A Nobel Prize for Asymmetric Information: The Economic Contributions of George
- Akerlof, Michael Spence and Joseph Stiglitz. Review of Political Economy 15 (1): 3–21.
- Stiglitz, Joseph E. 1987. The Causes and Consequences of the Dependence of Quality on Price. Journal of Economic Literature 25 (1): 1–48.
- Stiglitz, Joseph E. 2002. Globalization and Its Discontents. New York: Norton.
- Stiglitz, Joseph E. 2003. Information and the Change in the Paradigm in Economics: Part 1. American Economist 47 (2): 6–21.
- Stiglitz, Joseph E. 2004. Information and the Change in the Paradigm in Economics: Part 2. American Economist 48 (1): 17–49.
- Stiglitz, Joseph E., and Andrew Weiss. 1981. Credit Rationing in Markets with Imperfect Information. American Economic Review 71 (3): 393–410.
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