Last year’s Nobel Prize laureate in economics, Eric Maskin, participated in the 9th World Knowledge Forum on October 16 at Seoul’s Sheraton Grande Walkerhill to speak on his mechanism design theory.
He introduced the mechanism design theory as the “engineering” part of an economic theory. While traditional economic theories hold positive and predictive factors, focusing on preexisting economic institutions to project outcomes that institutions produce, mechanism design goes against this customary direction.
The mechanism design begins by identifying desired outcomes and questioning whether a mechanism can be designed to achieve such goals, taking on normative and prescriptive aspects.
Providing a number of examples to thoroughly explain the mechanism design theory, Maskin stressed that the mechanism design must be incentive compatible, integrating the goals of both society and individuals.
A particular example on the privatization of public assets showed that governments usually attempt to privatize its assets with anticipation for more efficient use. In search for the most apt buyer, the government could ask each candidate how they value the asset or auction it off. However, the two methods are considered as “risky” as they could either overvalue or undervalue the asset. Consequently, the 2007 Nobel Prize laureate adapted William Vickrey’s insight to devise a mechanism where bids are still received but the winning bidder only pays the price of the second highest bid.
Apart from the examples provided during the lecture, Maskin explained that the mechanism design theory can be vastly applied to many other dilemmas, such as the international treaty on greenhouse gas and policies to prevent financial crises.
However, he warned that once another objective is introduced to the situation, the nature of mechanism changes, requiring the need to modify.
[Dong-eun Lee/ JYJ][ⓒ Maeil Business Newspaper & mk.co.kr, All rights reserved]
