Nobel Prize: What is mechanism design and why does it matter?

Nobel Prize: What is mechanism design and why does it matter? | vox - Research-based policy analysis and commentary from leading economists

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"Environmental policy

Environmental policy has also benefited from the insights of mechanism design theory. The theory tells us that cap-and-trade systems, such as the system put in place by the Kyoto Protocol, are more cost-effective ways to reduce carbon dioxide emissions than command-and-control mechanisms. Mechanism design theory also tells us how to design environmentally sustainable fishing and hunting schemes in natural reserves. A few years ago, the UK government called on Maskin to help design a scheme that would maximize the corporate sector’s commitment to carbon dioxide emissions reduction for a given budget. Mechanism design theory was again put at work to provide a solution."

 

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What is mechanism design theory? "Three US-based economists - the game theory pioneer Leo Hurwicz, along with Eric Maskin and Roger Myerson – were today awarded the 2007 prize for work spanning 50 years in a branch of game theory that has come to be known as mechanism design.

Prof Hurwicz began working on forms of game theory with the influential economist Kenneth Arrow, who first outlined the pitfalls of information asymmetry in the 1960s and was awarded the Nobel prize in economics in 1972. But Arrow's work built on some of Hurwicz's research in the 1950s, and Hurwicz was regarded as having been overlooked, until now.

Myerson is a prolific author of academic papers and computer software tackling the subject. He is best known as one of the authors of an influential principle in mechanism design theory, the Myerson-Satterthwaite theorem, which finds that one side of a transaction stands to make a loss of some kind when two parties trade a good where they each have hidden and differing information.

Maskin has worked on the optimal design of auctions, alongside his colleague John Riley, and was hired to advise the Italian government on the operation of its bond auctions. He has previously worked as a research student and visiting fellow at Cambridge University."