Any number of markets are somewhat biased in that one side has more information than the other. For instance, borrowers know more about their chances of repayment than lenders; company boards know more about their firm's potential profits than shareholders; and clients know more about their actual risks than insurance companies. Such markets are said to be characterized by asymmetric information, and this year's winners of the Nobel Prize in Economics are credited with laying the foundation for a general theory of how these markets behave.

The three laureatesGeorge A. Akerlof, A. Michael Spence and Joseph E. Stiglitz (described below)will share equally the prize, worth 10 million in Swedish Crowns (about $950,000). They will accept their awards at a ceremony on December 10th in Stockholm.

  • George A. Akerlof, the Goldman Professor of Economics at the University of California at Berkeley, demonstrated how informational asymmetries can lead to so-called adverse selections in markets. For example, if car buyers have imperfect information, sellers with low-quality goods can crowd the marketan adverse selection that limits mutually advantageous transactions. The idea applies to a range of situations from the high interest rates on local lending markets in the Third World to the difficulties elderly people face in acquiring individual medical insurance.

  • A. Michael Spence of Stanford University analyzed cases in which better informed individuals in a market attempt to improve their outcomes by sharing facts with the poorly informed and identified just when such signaling in fact worked as planned. His own research focused on education in job markets. Other examples include how firms use dividends to signal profitability to agents in the stock market.

  • Joseph E. Stiglitz, former chief economist of the World Bank and now a professor at Columbia University, analyzed the opposite kind of market adjustment from those studied by Spence. He delineated what happens when poorly informed agents screen facts from the well informeda process that explains how, for example, insurance companies divide customers into risk classes by offering higher deductibles in exchange for much lower premiums