"The laureates showed how such effects of expectations about future economic policy can give rise to a time consistency problem.
"If economic policy-makers lack the ability to commit in advance to a specific decision rule, they will often not implement the most desirable policy later on," the Nobel jury said.
They will share the prize sum of $1.4 million.
The Nobel Economics Prize, the last of the six coveted prizes to be awarded this year, is the only one not originally included in the last will and testament from the creator of the awards, Swedish inventor Alfred Nobel.
It was created by the Swedish Central Bank in commemoration of its tercentenary in 1968, and was first awarded in 1969. It is also funded by the bank.
Last week, the Nobel Peace Prize was awarded to Kenyan ecologist Wangari Maathai for her campaign to save Africa's forests, while the Literature Prize went to Austrian writer Elfriede Jelinek, the author of The Piano Teacher, which was made into an acclaimed film by Michael Haneke in 2001.
The Chemistry Prize went to Aaron Ciechanover and Avram Hershko of Israel and Irwin Rose of the United States for groundbreaking biochemistry work that has major implications for the treatment of serious illnesses, especially cancer.
US scientists David Gross, David Politzer and Frank Wilczek won the Physics Prize for pioneering work in explaining quarks, nature's tiniest building blocks, while US research duo Richard Axel and Linda Buck won the Medicine Prize for their pioneering work on mammals' sense of smell.
Along with the other Nobel laureates, Kydland and Prescott will receive their prize from the hands of Sweden's King Carl XVI Gustaf at the official ceremony in Stockholm on 10 December, the anniversary of the death in 1896 of Alfred Nobel.