Economics Nobel goes to designers

The Nobel prize for economics has been awarded to three American economists for the development of a theory that describe situations where market economies function well and situations where they do not.

Their contribution to economics is called mechanism design theory, which done well results a system or game where each participant has an incentive to behave as the designer intends.

In the New York Times one laureate described his work as investigating "how society uses information to allocate resources."

The Nobel news release describes the work this way:

Adam Smith's classical metaphor of the invisible hand refers to how the market, under ideal conditions, ensures an efficient allocation of scarce resources. But in practice conditions are usually not ideal; for example, competition is not completely free, consumers are not perfectly informed and privately desirable production and consumption may generate social costs and benefits. Furthermore, many transactions do not take place in open markets but within firms, in bargaining between individuals or interest groups and under a host of other institutional arrangements. How well do different such institutions, or allocation mechanisms, perform? What is the optimal mechanism to reach a certain goal, such as social welfare or private profit? Is government regulation called for, and if so, how is it best designed?

The Nash equilibrium is one example of an optimized game.

Nobelprize.org describes how mechanism design fits into broader economic theory, and in particular how it can be differentiated from market theory, in this primer released for public consumption.

Wayne

Wikipedia: Game theory