I n 1994, the Royal Swedish Academy of Sciences awarded the Nobel Prize in
economics to John C. Harsanyi, John F. Nash and Reinhard Selten for their
contributions to noncooperative game theory. This was the first time the academy
had awarded a Nobel Prize to game theorists. It is difficult to imagine more
appropriate recipients. The purpose of this essay is to discuss and tocelebrate the
contributions of these three researchers to game theory and economic analysis.
I will not attempt to provide a full catalogue of the achievements of the three
Nobel prize winners, nor will I attempt to discuss their individual papers in detail.
A detailed analysis of a large portion of the work of Harsanyi, Nash and Selten can
be found in two excellent surveys, Guth (1994) and VanDamme and Weibull
(1995). A more concise treatment of the same material is provided in Van Damme
(1995). Although I have benefited greatly from these three papers in writing this
essay, my focus here is somewhat different: to identify the impact of the work of
Harsanyi, Nash and Selten on microeconomic theory in the last half-century and
to point to the parts of their papers that contained themost influential ideas. Thus,
I begin by reviewing the development of the role of game theory within modern
economic analysis by focusing on the contributions of researchers other than Harsanyi,
Nash and Selten. This will provide the proper context for the subsequent
discussion the work of the three Nobel Prize winners. The final section contains a
few closing comments on evaluating the roleof game theory and the style of research
championed by Harsanyi, Nash and Selten.
Game Theory and Economic Analysis
The first use of game theory in the analysis of an economic problem is
Cournot's classic analysis of duopoly. In this work, Cournot considers quantity
* Faruk Gul is Professoro f EconomicsP, rincetonU niversityP, rinceton,N ewJ ersey.
competition among two firms. The pricecorresponding to a given level of aggregate
output is determined by the market demand. Cournot computed what we would
now call the Nash equilibrium of this game.
John von Neumann and Oscar Morgenstern are justly viewed as the founders
of modern game theory. The work of von Neumann and Morgenstern differs from
the previous examples of game-theoretic analysis both in terms of the generality oftheir approach and the ambitiousness of their project. In von Neumann and Morgenstern
(1944), they define two-person zero-sum games in normal form and
showed the existence of a solution, or equilibrium, in such games.' They also define
extensive form games, discuss cooperation and coalition formation, and much
more. They state that their objective is to "find the mathematically completeprinciples
which define 'rational behavior' for the participants in a social economy and
to derive from them the general characteristics of that behavior."
Signs that game theory might fulfill the promise that its founders had foreseen
can be found as early as the 1960s. In a path-breaking article on auction theory,
Vickrey (1961) describes his purpose as investigating Abba Lerner's claim that asocialist government armed with a sufficiently powerful computer could reproduce
market outcomes through a centralized process.2 What is most striking is that Vickrey's
investigation of this issue focuses not on the computational difficulty of finding
the right prices or on transaction costs, issues that had been the focus of earlier
discussions on the workability of socialism, but on incentiveissues. Thus, in the
absence of markets, incentive constraints and strategic considerations are viewed
as defining the set of feasible outcomes from which socially desirable outcomes are
to be chosen.
In another paper written about the same time, Vickrey (1960) addressed the
problem of misrepresentation of preferences in a social choice setting. Arrow's
(1963) celebrated theorem establishes...