Oct. 12 (Bloomberg) -- Indiana University professor Elinor Ostrom became the first woman to win the Nobel Economics Prize when she received it with Oliver Williamson for research into the limits of markets and how organizations work.

Ostrom, in work that links the economy with the environment, has shown that informal groups can sometimes manage natural resources such as forests and lakes better than private companies or the government. Her doctorate is in political science rather than economics.

Williamson, who is professor emeritus at the University of California at Berkeley, is considered one of the founders of organizational economics -- the study of how institutions are created and developed and what impact they have on economic growth. In research that may apply to the financial crisis, he suggested that it is better to regulate large companies than to try to break them up or limit their size.

“Over the last three decades these seminal contributions have advanced economic governance research from the fringe to the forefront of scientific attention,” the Royal Swedish Academy of Sciences said today in Stockholm.

Ostrom and Williamson will share 10 million Swedish kronor ($1.4 million) in prize money.

“What you have here is a bow from the academy to those economists who study organization from the inside, and that’s an exciting, interesting field,” said Robert Solow, winner of the Nobel Economics Prize in 1987 and professor emeritus at the Massachusetts Institute of Technology.

Large Companies

Williamson found that large corporations exist primarily because they are efficient and benefit owners, workers, suppliers and customers, the academy said. They can abuse their power and may need to be regulated.

“You could and should interpret Ollie Williamson’s work as a way of getting into the question of how the large investment banks operate and how that led to what looks in retrospect to be very stupid and risky behavior,” Solow said.

President Barack Obama has proposed the most sweeping changes to financial regulations in 75 years, tightening oversight of big banks without overtly limiting their size.

Williamson said that there was no easy answer to the problem of financial institutions that are considered too big to fail because their demise could threaten the economy as a whole.

“There is no silver bullet,” he told reporters at a press conference at the university.

Predicting Hazards

He added that it may have been possible to foresee some of the hazards that prompted the worst financial crisis since the Great Depression and urged policy makers to pay more attention to the way organizations are set up and operate in the future.

Williamson’s work also helps highlight the conditions under which it is more efficient for companies to outsource tasks than perform them internally.

Williamson “has done a lot for companies to better understand when it’s best to purchase goods and services from the outside versus produce them in-house,” Richard Friberg, professor of economics at the Stockholm School of Economics, said in an e-mailed comment. “Williamson’s work has been influential as it’s often taught in higher finance classes.”

Williamson, who served as special economic assistant to the antitrust division of the U.S. Justice Department from 1966 to 1967, has described his analyses as a blending of the extremes of social science and abstract economic theory. His research has been credited with influencing everything from the shape of electricity deregulation in California to human resource management at technology companies.

Wisconsin Native

A native of Wisconsin, Williamson received a bachelor’s degree in science from the Massachusetts Institute of Technology in 1955, a master’s in business administration from Stanford University in 1960 and a doctorate in economics from Carnegie- Mellon University in 1963.

The 77-year-old, who joined the University of California as a professor in 1988, told reporters that he found out about the award after his son with the same name answered the telephone and said, “I think it’s for you.” He pronounced himself “lucky.”

Ostrom, who was born in 1933 and calls herself a political economist, said that her work should encourage citizens that they have a “capacity and power” beyond the bureaucracies that govern them.

In the case of global warming, while it is important to have an international agreement, “we can be taking steps at a family level, a community level, a regional level,” she told reporters by telephone at a press meeting in Stockholm.

Link With Environment

“This confirms the link between the economy and the environment,” said Susanne Sweet, Associate Professor of marketing and strategy at the Stockholm School of Economics. “Plus she’s the first woman to get the prize. It’s very exciting.”

Ostrom got her doctorate from the University of California, Los Angeles in 1965. She then moved on to the Department of Government at Indiana University. She joined the ranks of professors of political science in 1974 and held the presidency of the American Political Science Association in 1996 and 1997.

“My first reaction was a great surprise and appreciation,” Ostrom said. “There are many people who have struggled mightily, and to be chosen for this prize is a great honor.”

She said it was significant that she was the first woman to win the Nobel in economics.

‘Great Scientific Work’

“If you have lived through the era that I have lived through, getting into graduate school was a challenge,” she told a separate press conference at Indiana University. “We have already entered a new era. We recognize that women have the capabilities to do great scientific work.”

Ladbrokes Plc spokesman Joakim Roenngren said the betting firm paid 51 times the money on Ostrom and 21 times bets on Williamson.

“We did have some action on Williamson, but almost no bets on Ostrom,” he said. “You can definitely say that they are both long-shot winners.”

Alfred Nobel, the Swede who invented dynamite, established awards for achievements in physics, chemistry, medicine, peace and literature in his will in 1896. The economics prize was set up by Sweden’s central bank in 1968. Past winners include Milton Friedman, Amartya Sen and James Tobin.

The award’s official name is “The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel.” The money, a gold medal and a diploma will be handed out at a ceremony in Stockholm on Dec. 10, the anniversary of Nobel’s death.

The economics prize last year was awarded to Paul Krugman, a professor at Princeton University and a columnist for The New York Times, for his theories on world trade.

From 1969 to 2008, the Nobel Prize for economics was awarded to 42 Americans, eight Britons, three Norwegians and two Swedes. Economists from Germany, France, the Netherlands, India, Israel, Canada and the former Soviet Union each won once.

To contact the reporters on this story: Janina Pfalzer in Stockholm at jpfalzer@bloomberg.net. To contact the reporter on this story: Rich Miller in Washington rmiller28@bloomberg.net

Last Updated: October 12, 2009 14:50 EDT