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Two Americans share Nobel Prize in economics
Shapley, a UCLA professor, and Roth of Harvard, share the honour for their economic engineering theory.
Last Modified: 15 Oct 2012 13:11
Alvin Roth and Lloyd Shapley won Nobel's economics prize. [AFP]

US economists Alvin E Roth and Lloyd S Shapley have won the 2012 Nobel economics prize for their work on the functioning of markets and how best to match supply and demand, the Royal Swedish Academy of Sciences has said.

"The prize is about economic engineering," Professor Per Krussel, head of the Nobel Committee said on Monday. "It's about how to practically design certain markets so that they work well."

The context is "to pair together two different parties, like physicians to hospitals or students to schools," Krussel said, noting that "traditional market mechanisms" were not expected to function well in such circumstances.

Shapley, 89, is affiliated with the University of California in Los Angeles. He drew on game theory to design a mathematical algorithm in 1962, known as the Gale-Shapley algorithm.

In the 1980s, Roth realized that Shapley's work could be used to improve matching between medical students looking for work and hospitals looking to hire them, and later used it for other markets.

"It is a rapidly expanding field where economics is put to increased practical use," Krussel said.

Roth, 60, said by phone from California he was "very glad" to share the prize with Shapley, adding that "it would have been a grave oversight" not to award Shapley.

"This is a prize for matching and many of the most important things we do in life - from getting into university, to getting married, to getting jobs - are matching," Roth said.

Roth said the field of "market design" was "a newish area of economics" and that "when I go to class this morning, my students will pay a little more attention."

Roth is affiliated to Harvard University and Harvard Business School.

The prize is worth 8 million kronor (1.2 million dollars). It was the last of the 2012 Nobels to be announced. Prizes for medicine, physics, chemistry, literature and peace were announced last week.

The economics prize - formally called The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel - was first awarded in 1969.

The awards - with the exception of the economics prize - were endowed by Swedish industrialist Alfred Nobel, the inventor of dynamite. The award ceremony will be held on December 10, the anniversary of Nobel's death.

In 2011, US economists Thomas J Sargent and Christopher A Sims shared the economics prize for methods to study the relationship between economic policy and macroeconomic variables such as gross domestic product, inflation, employment and investments.

Monday's economics prize wraps up the 2012 Nobel season.

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