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How the Superconduit Just Might Work   Investment Banks: Not Dead Yet
Oct 15 2007 9:58AM EDT

Mechanism Design Theory for Dummies

This Nobel prize is exactly the sort of thing that journalists have nightmares about. They wake up early, and read a citation from the Royal Swedish Academy of Sciences giving the Economics prize to three economists they've never heard of, for helping to develop an entire discipline – mechanism design theory – that they've also never heard of. And so if I were you I'd leave the MSM alone and head straight over to Marginal Revolution, where Tyler and Alex are doing a great job of bringing us all up to speed. Start here, and then read more on Eric Maskin, Roger Myerson, and Leonid Hurwicz. Or alternatively, you can try my own 98-word explanation of what mechanism design theory is:

A mechanism is a framework, basically, within which one finds a market. Some markets don't need a mechanism to work well, but others do. For instance, let's say that you have a monopoly, and a regulator. The regulator sets up a framework so that the monopoly doesn't overcharge. Or let's say you want to sell a very illiquid asset like a rare and unique painting. An auction house will set up a framework so that your painting can be monetized in a transparent manner. Mechanism design theory is the science of structuring such frameworks in an optimal manner.

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