Tuesday, October 16, 2007

Nobel Reflections

As everyone knows, the Economics Nobel was awarded to Hurwicz, Maskin & Myerson for mechanism design. Marginal Revolution has wall to wall CNN style coverage here, here, here, here and here.

Personally, I like this award in that the three recipients are super-smart, well published, well cited, not overtly political dudes. However, there has also been a lot of back and forth about whether this was a pro or anti "market" prize.

I had Jim Little, a Minnesota PdD and student of Hurwicz, for Micro II in grad school and we were taught Hurwicz as a cautionary tale for designers, like an Arrow impossibility theorem for mechanism design. If memory serves, he proved that there cannot be a decentralized incentive compatible mechanism that doesn't waste resources. So I guess that would be pro-market, no?

Also, a lot of the explanation of mechanism design has centered on the properties of the second price auction. Again, if memory serves (and like the (in)famous T2, I only know what I learned in school (and I wasn't paying all that much attention)), the second price auction wasn't invented by mechanism design theorists, and it doesn't escape Hurwicz's theorem either. While auction theory has shown a lot of progess, the use of mechanism design for tax problems and public goods problems, in my opinion at least, has not made a lot of progress. That is perhaps what Tyler meant when he said this kind of work was falling out of fashion.

In other words, we've recently had prizes for auction theory (Vickrey and his second price style auctions) and game theory so to me the distinctiveness of the mechanism design field is its application to taxation and public goods provision where it's not working all that well.

But then again, I'm just an empirical macro/development/political economy guy from Oklahoma!