Vivian Hoffman, currently a Ph.d. candidate at Cornell.  When I read this description of her research I think that modern economics is very much on the right track:

I study the economics of anti-poverty and health interventions using household survey and experimental economics methods.  Most of my work to date has been in East Africa.  For my dissertation research on demand for and intra-household allocation of insecticide-treated mosquito nets, I conducted fieldwork in southwestern Uganda. Ongoing projects include a study on the impact of food aid receipt on labor supply and agricultural production in Malawi, estimateing the returns to farm assets in rural Ethiopia, and an experimental investigation into the effect of stigma on HIV testing behavior.  I hope to continue working at the intersection of health and development economics.  My interests also include health and poverty-related issues in Canada and the United States.

Here is the abstract on her main paper:

This paper reports results from a field experiment in Uganda. Whether a mosquito net was purchased or received for free affected who within the household used the net. Free nets were more likely to be allocated to those members of the household most vulnerable to malaria, whereas purchased nets tended to be used by the household’s main income earners. The effect was strongest for free nets received by the mother, increasing the probability that all children five and younger slept under nets by 26 percent relative to when nets had been purchased by either parent or given to the father.

In other words, within the household the breadwinners have a greater practical ability to control priced goods than non-priced goods.  This hints at one reason why men are often more willing to "think like economists" within the family.

You might think that Vivian has not yet done enough to be judged, but surely she has done enough to be judged as underappreciated.  So go appreciate her and remove that label from her name!

Overall,
mechanism design increases our appreciation of markets, if only by
showing how difficult it is to produce good outcomes while respecting
the constraints that markets must satisfy. In a sense, mechanism design
is to markets what genetic algorithms are to life. Theorists may one
day design a better market mechanism or a better genetic code but for
now the gains will come from using our deeper understanding to gently
improve something that’s already pretty marvelous.

That’s me writing at Reason.

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.

Ok, Grandma may still have some difficulty but in honor of today’s Nobelists, Hurwicz, Maskin and Myerson let’s give it a go.  Suppose that you are selling a rare painting for which you want to raise the maximum revenue.  There are two potential buyers, Tyler, who values the painting at $100,000, and Alex who values it at $20,000.  The problem would be simple if you knew this information – you would then set the price at $99,999 and Tyler would buy maximizing your revenue.  But how much Tyler and Alex value the painting is their own private information.  How then should sell the painting?

One possibility that springs quickly to mind is an auction.  In a standard English open-cry auction Alex and Tyler will bid for the painting and the bids will keep rising until Alex is forced to drop out at $20,001.  Thus the auction earns you $20,001.  Not bad but is this the maximum revenue possible?  Remember that Tyler values the painting at $100,000 so you could be leaving a lot of money on the table.

What else can you do?  Well, how about an auction with a reserve price, say $50,000 – think of a reserve price as a secret bidder who calls in his bids on the phone.  A reserve price of $50,000 works well in this case as Tyler will pay $50,001.  But note that you just got lucky, if Tyler had valued the good at $30,000 you would have earned nothing at all.  Thus you would like to know whether a reserve is always optimal and how to set it.  (Riley and Samuelson, and much more generally Myerson both show that a reserve price is always optimal and how to set it).

But why stop at a reserve price?  How about a reserve price and an entry fee?  But why stop at reserve prices and entry fees?  You can add any kind of requirement to the auction that you want but will these requirements help you to raise revenue?  Lets boil the problem down to its essence.  Think about an auction as a mechanism – bidders put information into the mechanism, their bids, and the mechanism tells them the outcome.  (Hurwicz was the first to really start thinking about mechanisms in these very general terms.)

You want to design the mechanism to achieve a certain outcome.  The mechanism can be as complicated as you want but it must satisfy certain conditions.  First, the bidders must participate voluntarily – you can’t boil them in oil – so there is a participation constraint.  At the end of the day the bidders must expect to be at least as well off as if they did not play the mechanism game (at least on average).

Second, there is an incentive compatability constraint.  You don’t know how much Alex and Tyler truly value the painting so suppose that Tyler mimics whatever Alex does – Tyler can do this since he values the painting at least as much as Alex does.  It follows that whatever outcome the mechanism assigns to Alex, Tyler must get at least as much.  This is a significant constraint because it means that if you want Tyler to do something different than Alex, and you do, you want Tyler to bid more, then you must give Tyler something in return.  Thus, even in the optimal mechanism you, the seller, are not going to get everything.  Tyler is going to walk away with some surplus.

We still haven’t solved for optimal mechanism, however.  And here is where the magic comes.  Not magic as in something wonderful but magic as in hand-waving.  Maskin and Myerson proved something very useful about mechanisms with these types of constraints.  It turns out that if you follow the constraints then you can restrict attention to mechanisms in which Tyler and Alex always tell the truth about their values, this is called the revelation principle.  (In a sense, this is obvious for imagine that we find the optimal mechanism given that Tyler and Alex submit whatever bids/information they want.  Then you tell Tyler and Alex – next time why don’t you tell the truth about your values and we promise to give you exactly the outcome that we would have given you under the previous mechanism.)

In the case of auctions the direct mechanism is well known, a second price auction.  In a second price auction the high bidder wins but pays the second highest-bid.  In this auction it makes sense for every bidder to bid his true value – see if you can work out why – and it turns out that as the revelation principle says, revenues in this direct auction are the same as in say a regular English auction (under certain conditions, of course).

Ok, I have gone on for a while.  Here’s the bottom line.  The basic set-up of agents with private information submitting "bids" which are then fed into a mechanism resulting in outcomes is very general.  How to raise taxes, regulate a monopolist, fund a public good (here’s my own contribution to mechanism design), allocate organs, assign interns to hospitals, split common costs, allocate electricity across a grid – all can be thought of as mechanism design problems.   The tools that Hurwicz, Maskin and Myerson developed and their methods of paying attention to participation and incentive compatability constraints and using the revelation principle helps us to design, at least in principle, the best solutions to all of these problems.

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.

The Nobel Scientific Background paper is the best introduction to all of these people, and a good introduction to mechanism design in general.

As for Myerson, here is his home page.  Here is his CV.  Here is one overview.  Here is Myerson in Google Scholar.

His most cited paper is on auction design.  He laid out basic results for how to use auctions to extract revenue and elicit information about the value of the good.  These results have informed numerous privatizations and auction schemes in the last twenty-five years.

Here is a very important paper, with David Baron, on how to regulate a monopolist with unknown costs.  Strict marginal cost pricing is no longer possible.  Under some assumptions, allow the monopolist to charge a relatively high price, but design penalties to elicit an honest reporting of costs.  The key point of course is that monopolists won’t always report their costs truthfully.  This is one of the most important papers in regulatory economics in the last thirty years and it has helped disillusion many economists with a narrow ideal of marginal cost pricing.

Myerson also has important papers on how social choice theory is linked to bargaining theory, and which social choice procedures are most likely to elicit truthtelling.

I think of his "Mechanism Design with An Informed Principal" as one of his most important papers, though Google Scholar does not concur.  Let’s say that a principal knows something an agent does not and wishes to maintain that information asymmetry.  How can a principal construct the best incentive scheme for the agent?  The problem is, choosing the scheme itself may reveal information to the agent and thus eliminate the principal’s advantage.  Myerson showed what solutions to this problem have to look like.  This is a very clever problem and a very elegant paper.

Among the current research papers you will notice a strong interest in public choice and institutions, though Myerson is not usually thought of as applied, nor is that where his influence has come.  Electoral rules, corruption, and political institutions all are commanding his attention.

Here is an interview with Myerson on game theory.  Here is Myerson’s take on the core problems of social choice theory, a summary of the theoretical side of the field.

Here is Myerson on Hurwicz, which is also a very good introduction to Hurwicz.

Off the beaten track, here is Roger Myerson on Thomas Schelling’s Strategy of Conflict.  Here is Myerson’s Op-Ed draft on why America should accept limits on its military power, namely to limit deadly rivalries.  Here Myerson recommends federalism for Iraq.

In view of these difficulties, it is desirable to design mechanisms in which all equilibrium outcomes are optimal for the given goal function. The quest for this property is known as the implementation problem. Groves and Ledyard (1977) and Hurwicz and Schmeidler (1978) showed that, in certain situations, it is possible to construct mechanisms in which all Nash equilibria are Pareto optimal, while Eric Maskin (1977) gave a general characterization of Nash implementable social-choice functions. He showed that Nash implementation requires a condition now known as Maskin monotonicity (see Section 3.3 for an illustration of this property). Maskin (1977) also showed that if Maskin monotonicity and a condition called no-veto-power are both satisfied, and if there are at least three agents, then implementation in Nash equilibrium is possible.

Maskin considered Nash equilibria in games of complete information, but his results have been generalized to Bayesian Nash equilibria in games of incomplete information (see Postlewaite and Schmeidler, 1986, Palfrey and Srivastava, 1989, Mookherjee and Reichelstein, 1990, and Jackson, 1991). For example, Palfrey and Srivastava (1991) show how the double auction can be modified so as to render all equilibria incentive efficient.

Maskin’s results have also been extended in many other directions, such as virtual (or approximate) implementation (Matsushima, 1988, Abreu and Sen, 1991), implementation in renegotiation-proof equilibria (Maskin and Moore, 1999) and by way of sequential mechanisms (Moore and Repullo, 1988).  Implementation theory has played, and continues to play, an important role in several areas of economic theory, such as social choice theory (Moulin, 1994) and the theory of incomplete contracts (Maskin and Tirole, 1999).

Giuseppe Bertola writes:

Just as the Eurozone countries began to enjoy full and irreversible
economic integration, inequality increased very sharply in the EU15 and
more sharply in the 12 Eurozone countries, bringing its previous
decline to an end and reverting to the 1996 level by 2004…one finds that EMU does appear to improve economic performance (both in
terms of per capita income and in terms of unemployment) and the
intensity of international transactions (especially as regards foreign
direct investment flows).  But it also appears to be associated with
higher inequality, and with lower social spending.  Interestingly, the
inequality variation associated with EMU is fully accounted for by
changes in social policy expenditure (excluding pensions) as a share of
GDP, and in GDP and unemployment (both of which are of course likely to
be influenced by integration policies, as well as by global cyclical
and technological development).

We will of course see how far this trend goes, but it is consistent with my view that Europe will, in economic terms, become like the United States more rapidly than vice versa.