Roger B. Myerson Prize Lecture



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320

PERSPECTIVES ON MECHANISM  

DESIGN IN ECONOMIC THEORY

Prize Lecture, December 8, 2007

by

R

OGER



 B. M

YERSON


1

Department of Economics, University of Chicago, 1126 East 59

th

 Street, 



Chicago, IL 60637, USA.

1. AN HISTORICAL PERSPECTIVE

Economics began with Xenophon’s “Oeconomicus” (c 360 BCE), in which 

Socrates interviews a model citizen who has two primary concerns. He goes 

out to his farm in the country to monitor and motivate his workers there. 

Then he goes back to the city, where his participation in various political 

institutions is essential for maintaining his rights to own this farm. Such 

concerns about agents’ incentives and political institutions are also central in 

economic theory today. But they were not always. 

Two centuries ago, economics developed as an analytical social science by 

focusing on production and allocation of material goods, developing meth-

odologies of national-income accounting and price theory. Questions about 

resource allocation seemed particularly amenable to mathematical analysis, 

because flows of goods and money are measurable and should satisfy flow-

balance equations and no-arbitrage conditions. From this perspective, the 

classical economic problem was that people’s ability to satisfy their desires 

is constrained by limited resources. The classical economic result was that 

unrestricted free trade can achieve allocative efficiency, in the sense that real-

locating the available resources cannot improve everyone’s welfare.

A shift of focus from allocation of resources back to analysis of incentives 

began from the time of Cournot (1838) when economic theorists began to 

analyze optimal decisions of rational individuals as a tool for understanding 

supply and demand in price theory (see Niehans 1990). In the first half of the 

20th century, a few mathematicians began to formulate models for analyzing 

rational competitive decisions in more general frameworks, laying the foun-

dations for game theory (Borel 1921, von Neumann 1928, von Neumann and 

Morgenstern 1944, Nash 1951; see also Myerson 1999).

I am very grateful to the Prize Committee for inviting me today. I also want to thank my co-



authors and colleagues, at Northwestern University and at the University of Chicago, and my 

friends and family who have come so far, especially Gina who has come the farthest with me. 




321

Within economics itself, a substantive need for analytical models that go 

beyond the limits of price theory gradually became evident. In particular, 

the inconclusiveness of economic theorists’ debates about socialism versus 

capitalism showed the limitations of price theory for evaluating non-price 

institutions like the socialist command economy (Barone 1935, Lange 1938, 

Mises 1935, Hayek 1935). Price theory could show (under some conditions) 

that free markets will achieve allocative efficiency, but such results about free 

markets did not prove that socialist command economies could not achieve 

similarly good outcomes. To allow analytical comparison of fundamentally 

different forms of economic organization, a new and more general theo-

retical framework was needed. In an widely influential paper, Hayek (1945) 

argued that a key to this new economic theory should be the recognition that 

economic institutions of all kinds must serve an essential function of com-

municating widely dispersed information about the desires and the resources 

of different individuals in society. That is, different economic institutions 

should be compared as mechanisms for communication.

Hayek also alleged that the mathematical economists of his day were par-

ticularly guilty of overlooking the importance of communication in market 

systems. But questions about fundamental social reforms require funda-

mental social theory. In a search for new fundamental theories, the abstract 

generality of mathematics should be particularly helpful. So the failure that 

Hayek perceived should not have been attributed to mathematical modeling 

per se, but it was evidence of a need for fundamentally new mathematical 

models. Among the mathematical economists who accepted this challenge 

from Hayek, Leo Hurwicz was the leader.

The pivotal moment occurred when Hurwicz (1972) raised the basic ques-

tion of incentives to communicate information and introduced the general 

concept of incentive compatibility. In doing so, he took a long step beyond 

Hayek in advancing our ability to analyze the fundamental problems of insti-

tutions. From that point on, as Makowski and Ostroy (1993) have observed, 

“the issue of incentives surfaced forcefully, as if a pair of blinders had been 

removed.” 

After Hurwicz (1972), many of us jumped into the breach to join the ad-

vance. From Harsanyi (1967), we had a general Bayesian model of games 

where people have different information, and we had Harsanyi’s general 

concept of Bayesian equilibrium to analyze rational behavior in such games. 

In this framework, we saw Hurwicz’s theory of mechanisms as the foundation 

of a theory about how to design Bayesian games. A coordination mechanism 

is a plan for how social decisions should depend on people’s reported infor-

mation, and changing the coordination mechanism in a society effectively 

changes the game that its members will play. Given the information, prefer-

ences, and resources that people have in a society, different social coordi-

nation mechanisms could yield different games, each of which could have 

many different equilibria. But remarkably, the set of all possible equilibria 

of all possible games can be simply characterized by using the revelation prin-



ciple, which many of us (Dasgupta, Hammond and Maskin 1979, Harris and 


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