To explain her ideas, the academy cited an example about dams in Nepal that Ostrom used in her 1990 book "Governing the Commons: The Evolution of Institutions for Collective Action."
Local people had for many years successfully managed irrigation systems to allocate water between users, but then the government decided to build modern dams made of concrete and steel with the help of foreign donors.
"Despite flawless engineering, many of these projects have ended in failure," the academy said.
That was because the new, modern dams cut out communications and ties between the users. The new dams required little maintenance whereas the earthen local dams forced users to work together to keep them functional.
Ostrom told the academy by telephone that she was surprised by their choice.
"There are many, many people who have struggled mightily and to be chosen for this prize is a great honor," Ostrom said. "I'm still a little bit in shock."
Ostrom doesn't know exactly how she will spend her share of the $1.4 million in award money, but she said she will invest it in her students and "wonderful" colleagues.
Williamson said he was "gratified" by the honor and hoped that in the future "organizations will play a more prominent role in the study of economic activity."
"The organization of the government itself is something which we ought to examine in a more self-conscious way - the Federal Reserve and the Treasury and the Securities Exchange Commission," Williamson said. "The mission that each of them has is mainly economic, but should be informed by good organizational practices."
Williamson previously was a consultant to the U.S. Federal Trade commission from 1978-1980 and a special economic assistant to the Assistant Attorney General for Antitrust at the U.S. Department of Justice in 1966-1967.
He was cited for his studies on how organizations - including companies - are structured and how that affects the cost of doing business. According to his theory, large private corporations exist primarily because they are efficient.
"Large corporations may, of course, abuse their power," the citation said. "They may for instance, participate in undesirable political lobbying and exhibit anticompetitive behavior."
But Williamson found it is better to regulate such behavior directly rather than with policies that restrict the size of corporations, the academy said.
Paul Krugman, a Princeton University scholar and a columnist for The New York Times, won the prize last year for his analysis of how economies of scale can affect international trade patterns.
The Nobel prizes, with the exception of the economics prize, were established by Alfred Nobel, the Swedish inventor of dynamite, in his will in 1895. The Economic Sciences prize, the last Nobel award to be announced this year, was created in 1968 by the Swedish central bank in memory of Nobel.
In addition to the prize money, Nobel winners will receive a gold medal and diploma from the Swedish king on Dec. 10, the anniversary of Nobel's death in 1896.
The choice of Obama, meanwhile, was the biggest surprise of this year's awards.
In other awards, American scientists Elizabeth H. Blackburn, Carol W. Greider and Jack W. Szostak shared the Nobel Prize in medicine for discovering a key mechanism in the genetic operations of cells, an insight that has inspired new lines of research into cancer.
The physics prize was split between Charles K. Kao, who helped develop fiberoptic cable, and Americans Willard S. Boyle and George E. Smith who invented the "eye" in digital cameras.
Americans Venkatraman Ramakrishnan and Thomas Steitz and Ada Yonath of Israel shared the chemistry prize for their atom-by-atom description of ribosomes.
Romanian-born German writer Herta Mueller won the literature prize for her critical depiction of life behind the Iron Curtain.
AP Writers Malin Rising in Stockholm and Martha Raffaele in Philadelphia contributed to this report.
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