Professor Sir James Mirrlees
Nobel Prize-winner known as ‘the economist of carrots and sticks’ for his work on transactions
PROFESSOR SIR JAMES MIRRLEES, who has died aged 82, shared the 1996 Nobel Prize in economic sciences with William Vickrey, for their separate work on the economics of asymmetric information, the study of transactions in which some parties involved know more than others. He became known as “the economist of carrots and sticks”.
Much classical economic theory presupposes a level playing field in which all sides in transactions have access to the same information about the goods or services involved and their value. But such transactions are rare in the real world. The buyer of a used car does not know as much about its performance and history as the seller; managers cannot tell how hard employees are working; a lender does not know how likely the borrower is to repay. Private information can distort people’s incentives.
Mirrlees’s objective was to understand how people can minimise these distorting effects, and how government can provide the right incentives to help them to make the right choices and balance equity and efficiency.
Information asymmetry also creates problems for governments operating a redistributive taxation system in an advanced socialwelfare state. Individuals know more about their abilities than the government does, and they may respond to taxes by working and producing less. It was Vickrey who, in the mid-1940s, pointed out that progressive taxes negatively affect work incentives.
Mirrlees built on Vickrey’s work by constructing a mathematically rigorous model for setting optimum income tax levels to enable government to fund services which provide a shared benefit to society without being an onerous burden on individual workers. His methodology became standard and helped to establish a whole new field of research.
The results of the application of his optimum taxation model, however, provided ammunition for a range of opinions, from advocates of higher taxes to provide increased government services to advocates of “flat tax” rates that would be the same at all levels of income. In 1971 Mirrlees published an article in which he calculated that the marginal tax rate should be about 20 per cent for everyone.
However, his principle that the government should apply high marginal rates at points in the earnings distribution where there are fewer taxpayers, relative to those with earnings exceeding this amount, have tended to show that the optimal structure of marginal rates has a U-shaped pattern, with high marginal rates imposed on high and low earners and lower marginal rates on those in the middle.
Mirrlees’s model established a paradigm for analysing many other economic issues where asymmetric information is a prime component, and he went on to apply mathematical techniques to the issue known as “moral hazard”, which occurs, for example, in the insurance market, where the insured person has an incentive to change behaviour after an agreement is reached, making it more likely that he or she will collect the insurance. Mirrlees was also co-creator, with Peter Diamond, of the Diamondmirrlees efficiency theorem, which was developed in 1971 and suggests that taxes should not be imposed on intermediate goods and imports.
The elder son of a bank manager, James Alexander Mirrlees was born at Minnigaff in Dumfries and Galloway and educated at Douglas-ewart High School, Newton Stewart. When the school’s rector asked him at 15 what he wanted to be, he replied: “A professor of mathematics.”
After taking a degree in Mathematics and Natural Philosophy at the University of Edinburgh, he went up to Trinity College, Cambridge, where, after obtaining degrees in Mathematics and Economics, he took a PHD under Richard Stone. He went on to teach at Cambridge, from 1963 to 1968, then at Oxford, where he was the Edgeworth Professor of Economics and a fellow of Nuffield College from 1968. In 1995 he returned to Cambridge as Professor of Political Economy, with a fellowship at Trinity College, retiring in 2003.
He held visiting professorships at various times at the Massachusetts Institute of Technology, the University of California, Berkeley, Yale and the University of Melbourne, Australia. In 2002 he was appointed Distinguished Professor-at-large at the Chinese University of Hong Kong, of whose Morningside College he was appointed founding Master in 2009.
A Labour supporter for many years (“out of a desire for egalitarianism, not for any great fondness for public ownership”), in 2010 Mirrlees chaired a review of taxation for the Institute of Fiscal Studies that suggested that the abolition of stamp duty should be accompanied by council tax reform. It also recommended the replacement of business rates and stamp duty land tax on nondomestic property with a land value tax on business and agriculture. For many years he was an unpaid member of the Scottish government’s Council of Economic Advisers.
A gentle, cerebral man, Mirrlees enjoyed spending his spare time reading detective novels and playing the piano.
He was knighted in 1997 and awarded the Royal Medal by the Royal Society of Edinburgh in 2009.
His first wife, Gillian, née Hughes, died in 1993, and in 2001 he married Patricia Wilson, who survives him with two daughters from his first marriage, and a stepson.