Award for auctions

The Nobel prize for economics is typically awarded to economists who have broken new ground in a particular sector of the discipline, or who have pioneered specific methods of investigation or analysis. The 2020 iteration of the award does this, but in fact also rewards a specific, incredibly influential act of policy design: The 1993-94 auction by the United States Federal Communications Commission (FCC) of telecommunications spectrum. The FCC picked up the suggestion made by the 2020 laureates, Paul Milgrom and Robert Wilson, and created a specific auction design based on then-recent advances in game theory that provided an efficient distribution of spectrum and also delivered considerable revenue to the government. The FCC telecom auction has been modified and adapted by multiple countries around the world — including, of course, India, where telecom spectrum allocation has been both a politically salient issue in the past and a major source of government revenue more recently. In other words, this economics Nobel is more than anything else an award for a specific and successful policy intervention, vanishingly rare in the economics field — unlike, say, in physics, where inventors, such as in 2014 the Japanese developers of the LED, are honoured as often as theoreticians or those who make discoveries. 

In other words, this is not just an award for economic theory, or even for economic policy analysis. It is an award for actual economic policy design — for creating a system that works in the real world, that balances key objectives of the public, and that is robust and transparent. So the question is: What can India take from the experience of this particular policy intervention? The answer is, a great deal. It might be believed that, by adopting the broad outlines of auctions for scarce resources, the Indian state is indeed following the example set by this year’s laureates. However, that would be an incomplete reading. In actual fact there is considerably more to how the 1993-94 auction was designed, which Indian policymakers should also consider carefully.

The crucial aspect is that the management of the process was broadly transparent, and that professional economists were involved in the design process throughout. These economists worked not just for the government, but for universities and indeed in some cases for the companies that would be bidding for the resources. They presented their alternative views as to how the auctions could be constructed, these were discussed in open seminars by the broader academic economic community, and then eventually the regulator picked one of the options alongside an explanation of why it did so. This was an exemplary policy that worked because it was well designed. The very mechanism that led to it being chosen is what ensured its excellence, given that the mechanism embodied the principles of expertise, independence, discussion, and transparency. Under such principles, concerns about collusion become less and less important. Profs Milgrom and Wilson, whose idea was adopted by the FCC, were in fact working for Pacific Bell, one of the companies that would be participating in the auction. But because the idea was presented and analysed in public and by multiple independent experts, it was trusted and subsequently replicated elsewhere. If observers in India worry that economic policymaking, including around auctions, has fallen far short of the gold standard rewarded by the Nobel this year, the difference in processes explains why.

 




Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel