STOCKHOLM - Two Americans and a British-Cypriot economist won the 2010 Nobel economics prize Monday for developing a theory that helps explain the obstacles that prevent buyers and sellers from efficiently pairing up in markets.
Diamond - a former mentor to current Fed Chairman Ben Bernanke - analyzed the foundations of so-called search markets, while Mortensen and Pissarides expanded the theory and applied it to the labor market.
Their work, dating back to the 1970s and '80s, sheds light on why the classical view of markets, in which prices are set so that buyers and sellers always find each other and all resources are fully utilized, doesn't always apply to the real world.
One example is the housing market, where buyers can struggle to find new homes even though there are a number of unsold properties available.
Another is the labor market. Because job searches take time and resources, it creates friction in the job market, helping explain why there are both job vacancies and unemployment simultaneously, the Royal Swedish Academy of Sciences said.
"The laureates' models help us understand the ways in which unemployment, job vacancies and wages are affected by regulation and economic policy," the citation said.
Their work resulted in the so-called Diamond-Mortensen-Pissarides model, a frequently used tool to estimate how unemployment benefits, interest rates, the efficiency of employment agencies and other factors can affect the labor market.
"One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times," the academy said.
Diamond, 70, is an economist at the Massachusetts Institute of Technology, and an authority on Social Security, pensions and taxation. President Barack Obama nominated him to become a member of the Federal Reserve, but the Senate has so far failed to approve his nomination. - AP