Duflo — a 46-year-old French-American professor who has served as an advisor to ex-US president Barack Obama — shared the Nobel with her husband, Indian-born Abhijit Banerjee of the U.S., and American Michael Kremer "for their experimental approach to alleviating global poverty," the Royal Swedish Academy of Sciences said.
"This year's laureates have introduced a new approach to obtaining reliable answers about the best ways to fight global poverty," the jury said.
The science academy said that "more than 700 million people still subsist on extremely low incomes", and that around five million children under the age of five still die every year from preventable or curable diseases.
The three found efficient ways of combating poverty by breaking down difficult issues into smaller, more manageable questions, which can then be answered through field experiments, the jury said.
"They have shown that these smaller, more precise, questions are often best answered via carefully designed experiments among the people who are most affected," it said.
Duflo is only the second woman to win the Nobel Economics Prize in its 50-year existence, following Elinor Ostrom in 2009.
Duflo, 46, told the Nobel committee in a phone interview the honour was "incredibly humbling".
"I didn't think it was possible to win the Nobel Prize in Economics before being significantly older than any of the three of us," she added.
Banerjee is 58 and Kremer is 54.
Addressing the fact that so few female economists had been honored, Duflo said this was also a reflection of the field in general.
"There are not enough women in the economics profession period, so you see this problem at all levels," Duflo told the Nobel Prize website.
In the past 20 years, more than three-quarters of economics laureates have been American white males over the age of 55.
Duflo has made her name conducting research, together with her husband, who was her PhD supervisor, on poor communities in India and Africa, seeking to weigh the impact of policies such as incentivizing teachers to show up for work or measures to empower women.
Her tests, which have been likened to clinical trials for drugs, seek to identify and demonstrate which investments are worth making and have the biggest impact on the lives of the most deprived.
"Our vision of poverty is dominated by caricatures and cliches," she told AFP in a September 2017 interview.
French President Emmanuel Macron hailed the "magnificent" Nobel awarded to Duflo, writing on Twitter that her work "shows that research in this field can have a concrete impact on the well-being of humanity".
Duflo said her husband and fellow laureate had "gone back to sleep" after receiving the call from the academy.
Banerjee in a later interview confessed he was not "an early morning person".
Careful to add that he did not think other fields of economics honored by the Nobel were not important, he said he was excited that research into alleviating poverty had received a nod, given that this area "not always is the immediate focus of a prize like this."
"I'm delighted that some attention was thrown this way," Banerjee said.
The son of two economists, Banerjee grew up in Kolkata in eastern India, and has been a vocal critic of Indian Prime Minister Narendra Modi.
Ahead of elections earlier this year — that saw Modi cruise to a second term — Banerjee advised the opposition Congress party on its proposed guaranteed basic income guarantee scheme for tens of millions of India's poorest, a programme akin to Universal Basic Income.
Banerjee and Duflo are both professors at the Massachusetts Institute of Technology (MIT) in the U.S., while Kremer is a professor at Harvard University.
In the 1990s, Kremer used field experiments to test interventions to improve school results in western Kenya.
He has also helped develop programs to incentivize the distribution of vaccines for diseases in the developing world.
Only Nobel not in will
Unlike the other Nobels awarded since 1901, the Economics Prize was not created by the prizes' founder, philanthropist and dynamite inventor Alfred Nobel, in his 1895 will. It was devised in 1968 to mark the 300th anniversary of Sweden's central bank, and first awarded in 1969.
Each of the Nobels comes with a prize sum of nine million Swedish kronor ($914,000, 833,000 euros), to be shared if there is more than one winner in the discipline.
But unluckily for recent winners, the prize's value has lost around $185,000 in the past two years, due to the depreciation of the Swedish krona.
This year's Nobel laureates will receive their awards at ceremonies in Stockholm and Oslo on December 10, the anniversary of the 1896 death of Alfred Nobel.
— Agence France-Presse