James Mirrlees, 60, shares the $1.12m (pounds 0.7m) prize with William Vickrey, an 82-year-old Canadian who teaches at Columbia University in New York. Although the two men have not met, the Royal Swedish Academy of Sciences cited both for their work on how economic decisions are made when there is uncertainty and only partial information.
Their research is therefore unusually realistic for economists, who normally assume away real-world difficulties such as one party to a contract knowing more than the other, or the fact that the future is unknown.
Professor Mirrlees virtually invented research into the "principal-agent problem", where a principal such as a shareholder pays an agent such as a manager to run a company. He also shaped the study of "moral hazard", when the fact that there are incentives to lie - in taking out an insurance policy, for instance - alters the kind of cover a company will offer.
His single most influential piece of research was a 1971 paper on the ideal structure of income tax, which concluded that marginal tax rates should be much lower. This prefigured the world-wide trend for cutting tax rates, although his recent research has led Professor Mirrlees to argue for higher taxes on middle-income earners.
Professor Vickrey, likewise, stands out for applying economic theory to practical problems such as how the United States should run auctions of government bonds, and fares policy on the New York subway.
"One of the charges against economists is that we are not very relevant," Professor Charles Bean, of the London School of Economics, said. "But this work is incredibly relevant. It is a well-deserved prize."
Professor Peter Sinclair of Birmingham University said: "Jim Mirrlees has played a huge role in the reshaping of economic institutions, from the design of managerial remuneration and the trend to contracting out right through to privatisations."
Despite his influence on the real world, however, many British economists regard Professor Mirrlees's work as arid and mathematical. It is a view encouraged by his austere Scots personality and imposing height, which tend to overawe people on their first encounter.
Professor Mirrlees himself said he was "full of glee" yesterday. "My second thought was to check the call was genuine," he added.
The British-born economist Ronald Coase, as a US citizen working at the University of Chicago, won the Nobel prize in 1991. The last Briton working in this country to win was Richard Stone in 1984.Reuse content