James Mirrlees' Contributions to the Theory of Information and Incentives

The theory of information and incentives has revolutionized economics. We now understand how markets and other modes of private economic transaction, as well as public policy, are affected when different participants have different information, or when the actions of some participants are not observable to others. Mirrlees has made pathbreaking contributions arguably the two most important contributions to the development of these ideas and methods of analysis. His Review of Economic Studies article [1971c] on optimal nonlinear income taxation introduced a technique that evolved into the "revelation principle", which fully characterizes all policies that are "incentive compatible", or feasible under information asymmetry. This technique is now the workhorse model for numerous applications. His Bell Joumal of Economics article [1976a] on hierarchies and organizations, and some of his important unpublished (yet widely circulated) papers referred to below, played a similar role for the theory of the design of incentives to induce effort. He identified the precise way in which observable outcomes convey probabilistic information about the underlying unobservable action, and thereby clarified how rewards or punishments based on outcomes can serve as incentives to action. Mirrlees developed these ideas in the context of specific applications. However, they are truly fundamental to economic theory, and they have profoundly influenced subsequent thinking and research on the design of