Hurwicz, Maskin, Myerson: The Trio Designing the Mechanism of Economic Games

The fundamental goal of the theory developed by the three laureates of this year’s Nobel Prize in Economics is to create a mechanism that will enable understanding the reasons why the market functions in some situations and not in others, and to help determine efficient trading mechanisms, regulatory concepts, and voting procedures.

Written by: Vanja Figenwald

Three Americans will share this year’s Nobel Prize in Economics. The Royal Swedish Academy of Sciences awarded it to Leonid Hurwicz from the University of Minnesota, Eric S. Maskin from Princeton, and Roger B. Myerson from the University of Chicago. They received it for their works and contributions in the field of mechanism design theory, which was initiated by Hurwicz and further developed by the other two. This theory, which plays a crucial role in various fields of economics and political science, attempts to explain how different institutions function in the economic environment, what mechanism is optimal for achieving a specific economic goal, and whether regulation is necessary, and if so, how it should be shaped.

Namely, the trio starts from observing the economic reality that deviates in many ways from the ideal of Smith’s invisible hand, as competition is not entirely free, consumers do not have perfect and complete information, often do not think within entirely rational frameworks, and many transactions remain hidden from the public space as they occur among individuals and closed groups. Therefore, their theory should improve the understanding of allocation mechanisms in an opaque and uncertain economic environment by taking into account the motives of individuals and private information, often inaccessible or dispersed among a large number of economic and other entities driven by private interests.

Uniformity of Budget and Social Welfare

The fundamental goal of the theory is to distinguish between situations in which the market functions and those in which it does not, and to help economists determine efficient trading mechanisms, regulatory concepts, and voting procedures. Scientists have applied game theory to discover the best and most efficient way to achieve desired goals, taking into account the knowledge and interests of individuals, which may be hidden or private. Mechanism design is a subfield of economics that involves determining the rules of the game to achieve a specific outcome. This is achieved by setting up a structure in which each player is incentivized to behave as the designer wishes. The game should then achieve the desired outcome, the strength of which, in turn, depends on the solution concept used in the game. Mechanism designers typically try to achieve the following basic outcomes: truthfulness, individual rationality, budget uniformity, and social welfare.

More advanced mechanisms attempt to resist harmful coalitions and players. Most of the results of such models have been established by economists, while some have been set by mathematicians, computer scientists, and electrical engineers. One subfield of mechanism design is the creation of markets, auctions, and combinatorial auctions, while another is the design of matching algorithms. A third is the application of public goods distribution and the optimal government taxation model. The usual purpose of mechanism design is to achieve desired outcomes according to a specific solution concept. The well-known Gibbard-Satterthwaite theorem shows that any outcome that can be implemented as a dominant strategy equilibrium must be exclusive and dictatorial, which is similar to Arrow’s impossibility theorem, and contrary to Nash equilibrium, applicable to many more rules of social choice.

Hurwicz’s Rule

Leonid Leo Hurwicz, a professor at the University of Minnesota, began developing the mechanism design theory used in economics, political science, and sociology, and was also a pioneer in applying game theory to economics. He was born into a Polish Jewish family in 1917 in Moscow, just before the October Revolution. He graduated in Warsaw and then went to London at the London School of Economics and later to Geneva. World War II would take him to Portugal and finally to the United States, where he continued his studies first at Harvard and later at the University of Chicago. His areas of interest included mathematical economics and modeling, as well as the theory of corporate resources.
International recognition came from his pioneering works in the field of mechanism design and institutions, as well as mathematical economics. Today, the oldest Nobel laureate collaborated in the 1950s with the youngest laureate Kenneth Arrow on nonlinear programming. Hurwicz’s rule is one of four classical solutions in decision-making processes. His work was crucial for creating a framework for analyzing systems such as capitalism and socialism.

Maskin’s Dynamic Games

The theory of incentive compatibility developed by him helped explain the reasons for the failures of centrally planned economies and how incentives can change individuals’ decision-making processes. He holds as many as six honorary doctorates and is a member of the National Academy of Sciences and the American Academy of Arts and Sciences. Maskin, also Jewish, is a professor of sociology at the Institute for Advanced Study at Princeton University. He received his education at Harvard and then went to work at Cambridge. The areas he dealt with largely do not deviate from Hurwicz’s, relating to game theory, incentive economics, and contract theory. He gained recognition for his works on the design and application of mechanisms and dynamic games. The third fortunate laureate, Roger B. Myerson, also Jewish, is a professor of economics at the University of Chicago, and he received his education at Harvard in applied mathematics.