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October 15, 2007

Nobel prize to three for incentive-centered design

Today the Royal Swedish Academy of Sciences awarded the Nobel Prize in Economics to Roger Myerson, Eric Maskin and Leonard Hurwicz for their (independent) contributions to the theory of mechanism design, which is the theoretical branch of economics that provides a good bit of the intellectual foundation for incentive-centered design. Here is a copy of the NYT article announcing the award.

Myerson, among other things, is credited with formalizing the Revelation Principle, on which we rely heavily to solve analytically for desirable mechanisms. He is also co-author of the famous Myerson-Satterthwaite paper in which they prove the impossibility of a mechanism that is guaranteed to simultaneously satisfy budget balance, individual rationality, and voluntary participation for a vast class of interesting problems (basically, anything that involves bilateral private information).

Maskin (a teacher of mine when I got my Ph.D. at MIT), among other things, is co-author (with Drew Fudenberg) of the formal proof of the famous "folk theorem" which demonstrates that almost any Pareto efficient outcome (including fully collusive outcomes) is an equilibrium in an infinitely repeated game if the rate of discounting is high enough. He also has made important contributions to auction theory, such as his 1984 paper with John Riley in which they solved for revenue-maximizing auction designs for monopoly sellers.

Hurwicz is widely regarded as the founder of mechanism design theory, starting with his 1960 paper in which he set out the formal definition of a mechanism. In 1972 he was the first to introduce the formal concept of incentive-compatibility, which is of course central to incentive-centered design.

This is not the first time the Nobel has been awarded for contributions to incentive-centered design. James Mirrlees and William Vickrey were awarded the prize in 1996 for their independent contributions to "the economic theory of incentives under asymmetric information", which is the central problem addressed by mechanism design (and both of their cited contributions were specifically mechanism design solutions to the problem: Mirrlees with tax system design, and Vickrey with auction design). Also, in 2001 Akerlof, Spence and Stiglitz shared the prize for their independent contributions to the economics of asymmetric information.

Posted by jmm at October 15, 2007 12:25 PM

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