spence

What It Is

A. Michael Spence is an economist who won the 2001 Nobel Prize for his work in market-signaling theory.

How It Works

Born in New Jersey in 1943 and raised in Canada, Michael Spence attended Princeton University, then received a Rhodes scholarship to study mathematics at Oxford. He entered the Ph.D. program in economics at Harvard in 1968. In 1973, Spence became an economics professor at Stanford, but returned to Harvard in 1975. One year later, undergraduates Bill Gates and Steve Ballmer enrolled in his graduate economic theory course (both got A's).

In 1990, Spence went back to Stanford as the dean of the graduate school of business, but left in 1999 to join colleagues at the hedge fund Oak Hill Capital Partners.

Why It Matters

Spence developed the theory of signaling to show how people communicate information about each other to avoid economic problems. Specifically, he showed that having a college degree signals a person's intelligence and ability to potential employers.

Spence also applied his theory to show that companies signal profitability to the market by paying large dividends, and that manufacturers signal quality by guaranteeing their products.

Source: Investing Answers