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Jean Tirole

It's All Game Theory

 

Jean Tirole

© C. Lebedinsky/CNRS Photothèque

Jean Tirole


Success has come naturally to this 54 year-old who has revolutionized entire–and very different–areas of modern economics. The author of more than 160 publications and eight reference works, Jean Tirole is currently director of the Toulouse School of Economics (TSE).1 In 2007, he was awarded the CNRS Gold Medal, the highest French award for scientific research.

a transatlantic career
In a country with a “weak” economic culture, his future was not immediately carved out. Initially a maths and engineering student at Ecole Polytechnique, Tirole chose to turn to economics, a discipline that allowed him to combine two of his major interests: mathematics and social sciences. In 1978, he began his doctoral research at the Massachusetts Institute of Technology (MIT), where he rubbed shoulders with the best in the field. “At the time, economics was flooded by abstract mathematics,” explains Christian Gollier, Associate Director of TSE. “Jean went against the current, taking up the banner for more concrete issues.”
As an MIT professor, Tirole took a sabbatical in Toulouse in 1991 to finish a book he was working on with one of his colleagues, Jean-Jacques Laffont. Laffont had an ambitious plan: to make the University of Toulouse a global center for their discipline. His enthusiasm was contagious and Tirole decided to stay put. Since then, he has continued his work with GREMAQ,2 but returns to MIT every year as a part-time visiting professor, “to keep one foot in the US, where most economics research takes place.” In 2004, following Laffont’s premature death, Tirole, solicited by his colleagues, took up the reins as head of the project in Toulouse. Indeed, his scientific achievements made him the obvious choice.

Multiple applications
Put simply, Tirole developed powerful theoretical concepts that he subsequently applied to a plethora of concrete problems. He became an expert in the new industrial economics, a field he helped found. In 1988, he wrote an authoritative book on the subject, now known worldwide as “The Tirole.”3 The scope of his work covers many fields, including the economics of open source, patent pools, and tacit agreements between corporations.
Another major area of his work focuses on the regulation of network industries, like telecommunications, electricity, railways, gas, the postal service, etc. “In these sectors,” he explains, “monopolies could trick the consumer with high prices for mediocre services.” With Jean-Jacques Laffont, he presented an entire range of measures to help regulate these monopolies.
Simultaneously, Tirole has explored a number of other research areas. One of these is finance, a field in which he has just released a book providing a global view of modern corporate finance. “In this work, Jean has structured 20 years of global research and opened new paths,” explains his colleague Jean-Charles Rochet.
From research to policy work
Tirole is not afraid to tackle controversial subjects. Thus, in the 1990s, with Jean-Jacques Laffont, he fought for the use of negotiable pollution permits (such as those that currently exist for greenhouse gas emissions), which allow firms to choose between pollution abatement and paying for permits. Tirole is already working on the post-Kyoto protocol, which will take effect in 2012.
Another cause he has taken on is unemployment. In 2003, he suggested that the French labor code adopt a similar concept to the “polluter pays” principle. Companies who laid off workers would have to pay a tax. “The current system is crime inducing: corporations that lay off employees do not pay compensation to the unemployment insurance fund, whereas companies who retain their employees pay unemployment insurance. The solution is to have companies pay a tax each time they lay off an employee, in exchange for a reduction of their payroll contributions and simpler procedures.”

Game theory
Last but not least, irrespective of the field in question, “‘it’s all but a game,” states Tirole. Or rather game theory, a branch of mathematics, and information theory, one of its ramifications. In designing our strategies, we all try to anticipate the behavior of others as well as their reactions to our own behavior. Tirole has developed refined tools for describing, analyzing and, in particular, predicting strategies for the players who are dependent on each other.
This includes the concept of “Markov perfect equilibrium,” defined by Tirole and Eric Maskin, who was his dissertation adviser at MIT and who was just awarded the 2007 Nobel prize. “This theory stipulates that we can always identify a variable–like the market share of a company, its production capacity, or national debt–which sums up in a pertinent fashion the history of a game, and lets us predict the future strategy of the different players.”
Applied to complex situations, Tirole’s work provides corporations and authorities with precious tools for making the right choices–and anticipating those of others.
Matthieu Ravaud

Notes :

1. With 106 researchers and approximately 100 PhD students, the TSE is among the best centers in economics in Europe along with other institutions like the London School of Economics.
2. Groupe de recherche en économie mathématique et quantitative (CNRS / Université Toulouse 1 / EHESS / INRA).
3. The Theory of Industrial Organization, Jean Tirole, MIT press, 1988, 479 p.


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