From this year's citation
While direct mechanisms are not intended as descriptions of real-world institutions, their mathematical structure makes them amenable to analysis. Finding the best of all direct mechanisms for a given problem is often straightforward, and once the best direct mechanism has been found, the researcher can “translate back” that mechanism into a more realistic mechanism. By this seemingly roundabout method, researchers have been able to solve problems of institutional design that would otherwise have been effectively intractable.
This year's Nobel Prize in economics goes to
Leonid Hurwicz, Eric S. Maskin, and Roger B. Myerson for "mechanism design." I never had Maskin for a course, but he seemed like a nice guy. I am not familiar with the other two.
This line of work is not to my taste at all. It is highly mathematical and inward-looking. It looks at conditions for static efficiency (allocating a given set of resources) and ignores dynamic efficiency (how well institutions adapt over time). I regard the "mechanism design" literature as representing a lot of effort expended on papers that only interest the expenders.
Tyler Cowen writes, "this is precisely the kind of work which is going out of style in the broader profession."
UPDATE: Tyler's co-blogger, Alex Tabarrok, has a more positive take.
UPDATE 2: See Lynne Kiesling's positive take as well as the links in her post.
UPDATE 3: If the right-wing Austrians can "spin" the Nobel Prize their way, well, so can the Economic Policy Institute, as John Irons explains.
Here is an example of mechanism design that has been applied to real organizations, and accounts for dynamic efficiency.
PRESS RELEASE:
Cambridge University Press is pleased to announce Leonid Hurwicz is the winner of the 2007 Nobel Prize in Economics.
Hurwicz is Professor emeritus at the University of Minnesota, and received the prize for his work initiating mechanism design theory. He has been a Press author for nearly 50 years.
The Press now publishes 21 of the 60 Nobel Laureates in Economics.
[Designing Economic Mechanisms, by Leonid Hurwicz and Stanley Reiter, can be found in the Cambridge Catalog.--Econlib Ed.]
"The work begun by Mr. Hurwicz, and advanced by Mr. Maskin and Mr. Myerson, gave economists and policy makers new intellectual tools to address questions like those listed in the academy’s citation: “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 institutional focus of this year’s laureates, economists say, is an important contribution. “Economists’ most lasting influence comes from the design of institutions,” said Robert J. Shiller, a professor of economics at Yale University. “It is these mechanisms we use day to day that really matter to our lives.”"
Seems important to me.