Leonid Hurwicz, Eric Maskin, and Roger Myerson

Win the Nobel Prize in Economics.  That’s funny, because this is precisely the kind of work which is going out of style in the broader profession.  These guys are smart, smart, smart, and Hurwicz is probably the best known of the three.  They are all high-powered theorists, doing incentives, mechanism design, and social choice theory.  None of them are easy to explain to your grandmother. 

Here is the scientific overview.

No doubt mechanism design, and the general problem of inducing truth-telling, will be with us forever.  But how practical are these general results?  Or have the theorists simply provided us with cautionary notes and left the real applications to the context-specific world of practice?  Did these guys get at the real reasons why we don’t organize the entire economy as a second-price auction?

Part of me thinks: "Hey, let’s say Natasha wants Yana to tell her the truth about when she will clean her room.  This stuff isn’t useful!"

Another part of me thinks: "It is most important to get theory right.  These guys are brilliant.  Only the philistines demand that all scientific contributions have immediate applications."

Some of you might argue: "These guys have already had a big impact on real world auctions and incentive schemes."  In terms of the induced improvement in human welfare, I find that a difficult case to make.  The important progress has come from recognizing much simpler truths about incentives.


So what's in-style these days then?

Well.. Out of style probably in the sense that economists tend to turn away from purely theoretical work. Some mechanisms truly make little sense outside theory.. To make Nash equilibria hold, theorists sometimes appeal to things like integer games (two players have to say a number, the highest wins - obviously no Nash equilibrium in here). Many in this literature, though, are aware of this and try to avoid such games.

But those guys are indeed diabolically clever. And mechanism design is still a beautiful field, with, I believe, a long and flourishing future ahead.

Will a woman ever win the Nobel Prize in Economics?

I wouldn't say that this topic is out of style. Just recently, the Harvard Business Review (in the October 2007 issue, article "The Art of Designing Markets") discussed "a new field of economics" - market design, formed thanks to the developments in game theory and experimental economics. The applications mentioned were organization of radio spectrum auctions and efficient matching in markets in general - in particular kidney exchange (paired kidney donation), medical labor markets, deferred-acceptance algorithm to match students with schools - I think that pretty much could be classified as the "clever empirical work directed at social topics."

Well said, Tyler.

"These guys have already had a big impact on real world auctions and incentive schemes. In terms of the induced improvement in human welfare, I find that a difficult case to make."

I find that a remarkable statement. It is extremely difficult to point to any field of economics which has obviously made any positive contribution at all to human welfare. (And it is not so difficult to point to a few which have probably had large, negative impacts). Mechanism design is one of economic's rare success stories. It may only be a more efficient allocation of the airwaves, and huge windfalls for government coffers, but that simply demonstrates how difficult it has been for economics to make significant practical contributions in wider fields. Beggars shouldn't be so choosey...

Perhaps Tyler is so snarky because in many many respects this is the anti-Austrian prize.

"Will a libertarian ever win the nobel peace prize?"

Vernon Smith, Friedrich Hayek and Milton Friedman all won Nobels. Douglass North and Robert Lucas are pretty pro-market/anti-intervention, even if not outright libertarians.


The "themes of incentive-comptability, information etc" are not the exclusive province of Hayekians. How do you think Maskin and Myerson's work (I have to admit to knowing it better than Hurwicz's) fits into the socialist calculation debate? Not on the Austrian side, I'd submit. A standard interpretation would be that these are tools for alleviating Hayek's concerns about the information content of prices. There is a reason why it's called mechanism *design* and not mechanism *spontaneous order*.

They asked Hayekian questions and got not-so-Hayekian answers.

I am a bit surprised. I was strongly expecting a prize in an applied micro area: either international, IO or public finance. People like Bhagwati, Tirole etc. Hadn't expected a pure theory so soon after the game theory prize a couple of years ago.

As for mechanism design I haven't studied it in detail but it does seem to be one of those areas where the broad ideas seem interesting and relevant but most of the energy is spent on mathematical minutiae which tell us more about the models rather than the real world. Unfortunately a lot of economic theory is like this: the basic principles are useful but the marginal utility drops sharply as the sophistication increases.

I am surprised by Alex's comment. No doubt Hurwicz sees himself as the heir of Hayek, but a) the social problem is treated as fully about articulable information, b) it ignores the elements of Hayek brought out by Buchanan, c) it is indeed about "design," d) social order is seen as stemming from single nodes, unlike as in Hayek and Polanyi, and e) it is not obvious that the incentives of the designer are properly factored in; see for instance Hayek's *The Road to Serfdom*. To be sure, economists are used as consultants in auctions. But on auctions I stand by my words: "In terms of the induced improvement in human welfare, I find that a difficult case to make. The important progress has come from recognizing much simpler truths about incentives." Just how much better do you think Sotheby's is run these days? Most of all, auctions are about marketing, not the static revelation of preferences.

"They asked Hayekian questions and got not-so-Hayekian answers."

That's a fair reading but I would say it's an odd and ahistorical reading. If we compare Hayek with his opponents in the socialist calculation debate the mechanism design literature has Hayek winning hands-down and his opponents looking very naive. Thus on the first page of the explanation for the award the prize committee says:

"These results support Friedrich Hayek's (1945) argument that markets efficiently aggregate relevant private information."

Of course there are also results from mechanism design showing where markets break down. But what sets mechanism design apart from say the standard public finance literature is the attempt to create "market-like" institutions to solve some of these break downs.

Thus, I would say that mechanism design uses a deeper understanding and appreciation of how markets work to create market-like institutions to improve on markets, in the cases where standard markets do not work well.

AMW: Yes, but they did not get nobel peace prizes, did they? :)

Just in general, a huge note of thanks for your and Alex's going to the effort of compiling all these references for the rest of us. Unfortunately, I now have just that much more to read--or at least to skim.

I hate to ask, but was this selection even slightly politically motivated? I see that the byline on their New York Times profile is "designing institutions were markets fail", a little bit telling to me. And InTrade didn't seem to give them that high a possibility of winning. I am but a lowly college student, however, who doesn't have authority or knowledge to judge the import of their works...

It is surprising to have another award so close to game theory again so quickly. Roger Myerson is definitely a game theorist, even doing some cooperative game theory, which keeps seeming to be on the verge of coming back into style. I assume he's involved in organizing the next Game Theory Society world congress next summer at Northwestern where he used to be. Eric Maskin's definitely active in that society as well.

Nice to see real game theory isn't going away any time soon.

Politically motivated?! Perish the though! The NY Times would never do anything like that, right?

I think we're just starting to realize the benefits of mechanism design theory. The benefits will become especially large when we have greater broadband penetration, so entire communities can participate in these mechanisms over the internet.

Here's the next frontier: Take a community, maybe a community such as Glasgow, Kentucky, with a community-wide intranet. Implement Smith auctions over the intranet in that community to decide on local public goods, and see what you get. In the case where the community has to throw money away to obtain truthful revelation, well, then they simply give those funds to a sister city, and that sister city implements Smith auctions and gives excess funds to that city.

As for the political motivation -- I don't see much reason to suspect it. Rather, I think that the NYT article was a bit lopsided in its discussion.

Rather than mechanism design being mostly about market failure, which is the implication in the NYT, I think it more in the way of a generalization and abstraction about economic institutions of which traditional markets for private goods with well defined property rights are one example. Mechanism design allows for some more generalized/abstract institutional thinking.

Mathematical mania rules the committee selecting Nobel laureates.What's the use of these designs in a developing country? I doubt.Also, we are fed up with game theory.It seems that pure economists are ignored (Profs.Baumol,Bhagvati,Krugman and others)and mathematicians dealing with narrow theory are instead selected.

Milton Friedman - beloved, no doubt to many readers of this blog - dabbled in auction design in the early 1990's when he advised the government to switch to a uniform-price auction for treasury bills. (Friedman, Milton, 1991. "How to Sell Government Securities", Wall Street Journal, August 28). Merton Miller (winner of the 1990 Nobel Prize in economics) also argued in 1992 in favor of experimenting with the uniform-price auction. Both of these eminent economists ended up with egg on their faces, however, for not understanding the crucial distinction between a Vickrey auction for a single object, and Vickrey auctions when multiple objects are for sale, even though Vickrey himself was very clear on this. (Vickrey, William, 1961. “Counterspeculation, Auctions, and Competitive Sealed Tenders,† Journal of Finance, 16, 8-37).

This may be a simple case of sending in a boy to do a man's .... but I suspect that Friedman, like some of the commentators above, was too impatient with difficult and carefully worked out mathematical theory (a la Vickrey, and today's new Noble Laureates), and thought he could extend a simple insight from one type of auction to another, where it did not belong.

For a little more on Milton Friedman's famous blunder see: http://www.cramton.umd.edu/papers1995-1999/98wp-demand-reduction.pdf. Didn't someone above say, "the applied auction work did not require ANY of the formal theorems that were proven to be true"? If only Friedman had paid closer attention to a few more theorems he could have saved himself the embarrassment..

"Will a Marxist get the prize ever?"

Not now that Groucho is dead.

"Will a Marxist get the prize ever?"

Will Strasbourg ever replace their weeklong celebration of Mozart with a tribute to Brittany Spears?

Keith: The way my contract theory professor told the story, it was a team of McKinsey consultants advising the New Zealand government. According to page 9 of Milgrom's book Putting Auction Theory to Work, it was actually the consulting firm NERA.

If the spectrum auction is an example of their great triumph it is an odd triumph indeed.

After all, isn't that also the auction where these theorists were supposed to have designed an anonymous and collusion proof mechanism that was circumvented in the end by large bidders who chose odd ending values (I remember a number like 18.18 million) to signal who they were? NO formal theorems were helpful for that. They were not less prone to error than Friedman because their work was more formal.

At the end of the day, it was about cleverness and who could outthink the big companies. No surprise, you put smart guys on the job and it helps a lot. But it wasn't their findings. There is still no evidence that without the formal theorems such an auction would not have been possible. There is indeed no evidence that one needs theorems to work out intricate examples of incentive compatible mechanisms, just as you don't need Zermelo's theorem to develop a chess machine.

This is the same kind of puffery that followed Debreu's prize, when people argued that GE theory now "proved" Adam Smith.

That is not to take away from the profundity of their work as math theorists. But I continue to disagree on the so-called applications.

Oh yes, and btw to those of you wondering about why another prize to game theory so soon?
Just think of the influence of Juergen Weibull on the committee. I would submit that is the
answer to that question.

"Oh yes, and btw to those of you wondering about why another prize to game theory so soon? Just think of the influence of Juergen [should be Jörgen] Weibull on the committee. I would submit that is the answer to that question."

I agree that it seems likely that Weibull has pushed in that direction. But I would guess that, for any given field, there was also a strong desire (maybe in particular on the part of Weibull) to award the pioneering guy, who in this case was Hurwicz, and then the prize to mechanism design couldn't wait.

Tyler says, "Most of all, auctions are about marketing, not the static revelation of preferences."

On this note, read the story of Hurwicz' son and his effort to sell his father's house:


Hurwicz studied with both Hayek and Mises. See his remarks here:


...libertarianism is code for "I made my pile all by myself, I deserve it and don't you dare take away a jot of it for any cause however deserving"...

No, its not. If people actually stopped beating up straw men all day long, it may not take so many decades for advances in political "science" and economics to occur. Of course if that happened interventionists would have to admit that either their arguments are based on absurd premises, or they simply want to wield power over others. So I'm not holding my breath.

I am surprised by Tyler's comment "The important progress has come from recognizing much simpler truths about incentives." How would Tyler propose that "simple" principles be used to design auctions for the spectrum, which can be sliced up in a thousand different ways? Maybe he should tell the FCC that they wasted their money hiring mechanism design (auction) theorists. What is the obvious method for auctioning spots on Google? Does Tyler have an intuitive, efficient and strategy-proof mechanism for housing or school matching? If so, I am sure that Parag Pathak, the brilliant young Harvard graduate student who is now at the Society of Fellows for his pioneering work in this "out of style" field, would love to hear about it. Does Tyler have a more elegant solution than Maskin and Riley to the price discrimination problem? If so, I think he should talk to some of the companies that Maskin and Robert Wilson have consulted for.

Actually, as the one who made that remark, the more I think about it the more I think that the
real bottom line was Hurwicz's age. I have no doubt that the key player was Weibull, as I have
already argued. But it seems in recent years that the committee has been worrying about picking
up on senior, "underappreciated" giants. This year it looks like the top three were the more
publicized Gordon Tullock and William Baumol, both of whom did pretty well on the intrade betting
market. But, Hurwicz just happens to be older than them, at 90 the oldest Nobel recipient ever.
So, that is why "the next game theory award" got jumped ahead, undoubtedly pushed by Weibull.

um, sorry about the previous comment, it seems appropriate that I write a short summary of my points here:

I think mechanism design is indeed quite abstract and I think many theoretical papers in MD are not directly "doing much for the world in general". The field also seems to be going out of style, at least it seems there is not much left to be done. But these things are true at the purely theoretical level.

When it comes to applications, then the field is wide open and most work has not even started yet. Mechanism design can be useful in many other fields of economics, from health to development. What is needed however is a person with enough understanding of the abstract theory and enough knowledge/interest for the real world to bring it to innovative solutions in old problems like corruption etc

Until now it seems pure mechanism designers find simple applications boring and other people (like macroeconomists) significantly underestimate the power and complexity of MD (Milton Friedman being a prominent but not only example).

Hurwicz has done important work that is DEFINITELY Hayekian. Namely, he showed that when transmitting economic agents' private information is costly, and so the "socialist" mechanism (also known as direct revelation mechanism) in which all information is reported to the Center is impossible, the simplest way of implementing an efficient outcome is using a market price equilibrium, in which only prices are revealed and agents respond to prices by maximizing their private preferences. This work, which does not even look at incentives, and is rather related to the subsequently developed computer science theory of "communication complexity," is unfortunately not well known now. I have done recent research that generalizes this insight to a large class of allocation problems, including many practical "market design" problems in which the classical Walrasian equilibrium is inapplicable. This approach explains why even in such problems, the only practical way to proceed is by finding discovering the right supporting "price equilibrium," as opposed to a "socialist" mechanism in which all preferences are reported to the center.

My guess is that the main real world benefits from mechanism design so far are found in the related improvements in the quality of procurement (esp. gov't procurement in tricky markets like defense) and the quality of regulation of privately operated infrastructure companies.

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