Scottish philosopher Adam Smith asserted that when everyone acts out of self-interest, everyone will eventually benefit, as if a benevolent "invisible hand" molds the economy. Economists now know that view is naive: they can prove that in some situations, rational people will act in ways that leave everybody a loser. But such dreary outcomes can sometimes be avoided, thanks to work that today earned three Americans the Nobel Prize in Economics. Leonid Hurricane of the University of Minnesota, Twin Cities, Eric Masking of the Institute for Advanced Study in Princeton, New Jersey, and Roger- Myers on of the University of Chicago, Illinois, developed "mechanism design theory." Such study aims to find schemes, or "mechanisms," that ensure that acting in self-interest will indeed lead to benefits for all. Today, the theory's applications range from how best to auction broadcast rights and other public resources to contract negotiations and elections. Mechanism design theory starts with the recognition that unbridled self-interest doesn't always lead to the greater good. For example, suppose the people of a town would benefit if they built a bridge across the river. Everyone is asked to estimate how much the bridge is worth to him person. ally and chip in accordingly. Rationally, each person benefits by underestimating his stake in the bridge and letting others bear the cost. So for lack of Ends, the bridge never gets built, and the whole community suffers.
In the 1960 Hurricane pioneered the study of how to avoid such dead ends by fiddling with the rules of such an economic interaction. For example, in the case of the bridge, the amount each person pays could be based on only what others think the bridge should be worth, thus eliminating each person's incentive to lie about its value. Masking and Myers on expanded on Hurricane's work. For example, in 1977, Masking developed a criterion for determining just when it's possible to find a set of rules that will guide self-interested participants to the desired end. This sets some boundaries on what mechanism design theory can do," says Asimov Moliere, an economist at Columbia. Starting in the late 1970 Myers on showed that whenever a mechanism exists, it is also possible to find one that gives participants an incentive to tell the truth. Relying heavily on game theory, the laureates' work has been largely abstract and formal. Nevertheless, the theory may play a role in confronting perhaps the most complex health related articles facing humanity today, climate change, by helping to set up incentives that encourage consumers and countries to minimize greenhouse gas emissions. But first, politicians must identify the specific end they are working toward, Masking says. "Mechanism design should definitely be pertinent to the problem," he says, "but first we have to decide exactly what we're trying to accomplish."
In the 1960 Hurricane pioneered the study of how to avoid such dead ends by fiddling with the rules of such an economic interaction. For example, in the case of the bridge, the amount each person pays could be based on only what others think the bridge should be worth, thus eliminating each person's incentive to lie about its value. Masking and Myers on expanded on Hurricane's work. For example, in 1977, Masking developed a criterion for determining just when it's possible to find a set of rules that will guide self-interested participants to the desired end. This sets some boundaries on what mechanism design theory can do," says Asimov Moliere, an economist at Columbia. Starting in the late 1970 Myers on showed that whenever a mechanism exists, it is also possible to find one that gives participants an incentive to tell the truth. Relying heavily on game theory, the laureates' work has been largely abstract and formal. Nevertheless, the theory may play a role in confronting perhaps the most complex health related articles facing humanity today, climate change, by helping to set up incentives that encourage consumers and countries to minimize greenhouse gas emissions. But first, politicians must identify the specific end they are working toward, Masking says. "Mechanism design should definitely be pertinent to the problem," he says, "but first we have to decide exactly what we're trying to accomplish."
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