Leonid Hurwicz, Nobel Laureate

by on October 15, 2007 at 9:08 am in Economics | Permalink

Here is Wikipedia on Hurwicz.  He is the granddaddy of the group, and the Nobel Committee sums it up nicely:

The seminal work of Leonid Hurwicz (1960,1972) marks the birth of mechanism design theory.  In Hurwicz’s formulation, a mechanism is a communication system in which participants exchange messages with each other, messages that jointly determine the outcome.  These messages may contain private information, such as an individual’s (true or pretended) willingness to pay for a public good.  The mechanism is like a machine that compiles and processes the received messages, thereby aggregating (true or false) private information provided by many agents.  Each agent strives to maximize his or her expected payoff (utility or profit), and may decide to withhold disadvantageous information or send false information (hoping to pay less for a public good, say).  This leads to the notion of “implementing” outcomes as equilibria of message games, where the mechanism defines the “rules” of the message game.  The comparison of alternative mechanisms is then cast as a comparison of the equilibria of the associated message games…

Hurwicz’s (1972) notion of incentive-compatibility can now be expressed as follows: the mechanism is incentive-compatible if it is a dominant strategy for each participant to report his private information truthfully.

In other words, no incentive scheme, no matter how clever, can get people to tell the truth.  Grove, Clarke, Tideman, and Tullock lurk in the hallways.  Note that a second price auction (let everyone bid and the winner pays the price of the next highest bid) fails in terms of Paretian optimality.  The government takes the second price bid from the winner, but what should it do with the money?  Either the government wastes resources by destroying wealth, or it redistributes that wealth in some way but then the resulting redistribution in turn feeds back into bids and we can no longer derive truth-telling as optimal (but is this really a practical problem?; my fear is that the entire incentive-compatibility literature has never gotten at the real reason why we don’t run the entire economy as a second-price auction.) 

Here is Roger Myerson’s very nice piece on Hurwicz.  Myerson ties Hurwicz to the socialist calculation debate of Mises and Hayek and also to the later work of Jean Tirole.  It is sometimes said that moral hazard problems favor capitalism, adverse selection problems favor socialism.

Hurwicz also wrote a very important paper with Kenneth Arrow on the stability of general equilibrium theory, as well as other notable theory pieces, not all on mechanism design.  Here is a list of major works, some of the early ones have pdfs attached.

1 Mike Giberson October 15, 2007 at 10:18 am

In Myerson’s article he writes: “Under socialism, there is no problem getting the manager to reveal type honestly, because he is willing to report his type honestly when we just pay him a flat wage no matter what he reports.”

Either I don’t understand what he means, or this is a very stupid statement. I can see that the manager would have no incentive to mis-reveal type, but that seems different from “no problem getting the manager to reveal type honestly.”

But overall I agree it is a nice piece on Hurwicz.

2 Barkley Rosser October 15, 2007 at 5:14 pm

I can appreciate that this choice is not a favorite of the public choice crowd at George Mason,
not to mention the more Austrian-oriented folks. Yes, Hurwicz-style mechanism design is basically
how to do central planning right. I remember when he gave his Ely Lecture some years ago to the
AEA. I saw Jim Buchanan walking out partway through, looking somewhat less than pleased, although
perhaps he just needed to go to the bathroom urgently.

3 Edgardo October 15, 2007 at 11:02 pm

To Barkley Rosser,
You refer to the December 1972 AEA annual meetings in Toronto. I’d just finished my Ph.D. in Minnesota and I was luck enough to take Leo’s flight from the Twin Cities to Toronto. In 1967-70, I had attended his regular Welfare & GE course and a couple of his advanced seminar on Econ Theory (one was given jointly with Usawa when he was in Chicago and agreed to visit Minneapolis on Saturdays). He enjoyed greatly being part of that small group of great economists that developed neoclassical economics and he knew that his Ely’s lecture would make a difference in its extension. In addition, he was an excellent teacher (a year ago I was asked to answer four personal questions to secure the access to an online bank account and one was who my favorite teacher was–my reply LeoH). It is true that some of those economists were interested in implementing a socialist market economy (in particular, Oskar Lange, who returned to Poland and was responsible for such attempt; I understand that Leo had worked with Lange in the Cowles Commission when it was in Chicago), but I never heard that Leo had any intention of doing that. I’ve always regarded Leo close to Debreu, J. Marshack, and others that were interested only in expanding neoclassical economics (I hesitate to include Arrow in this subgroup but we should remember that in the 1960s he was mainly concerned with this expansion). Tyler and others may consider this expansion useless, but that is their problem.
In 1979-80, I spent some time in Blacksburg. I learnt to appreciate greatly the work of both Jim Buchanan and Gordon Tullock. I’m not surprised to learn that Jim was not pleased with Leo’s lecture but you know that in the 1960s Jim had been too much concerned by the attempts to use the new Welfare Economics to justify government intervention. Each research program has its limits but those involved in its development recognize them too late. I remember I met Leo in 1988 or 89 in the AEA annual meeting in New York. He was still working hard to further expand neoclassical economics (he presented a short paper comparing analytical approaches to institutions). Whatever the value added by Leo’s work in the 1980s, at that time institutional analysis was starting to move in other directions.
Let’s hope that in 2008 we can celebrate Gordon as the winner of the Nobel Prize in Economics.

4 Bill Stepp October 16, 2007 at 7:49 am

“[I]nconclusive nature of their debate”? Just get the socialist planners’
incentives right! Uh huh.
There’s nothing wrong with socialism that getting rid of Che’s firing squads
wouldn’t fix.

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