Invention spotlight: mechanism design theory

November 6, 2012

Talent, Technology

Balance

Not all inventions manifest as gadgets and medicines. Some of the greatest contributions of University of Minnesota researchers have come alive on a dusty chalkboard. That was the case when U of M Professor Emeritus Leo Hurwicz laid the foundation for mechanism design theory. Today, this revolutionary framework is central to the study of economics and the practice of predicting outcomes.

Building on Adam Smith’s “invisible hand” theory, mechanism design is based on the idea that social, political and economic institutions can be designed to yield optimal results by balancing incentives for the individual with the larger system goal. Hurwicz refined this theory to account for markets that are seldom perfect, and for individuals who are less than honest.

“Whenever I was asked to present some of my work, I would start by saying, ‘of course, the incentive problem is very important, but I will assume that people are angels. … At some point I decided that since I know people are not angels, perhaps I should not completely ignore the incentive aspect,” Hurwicz once explained in an interview.

The theory has applications in designing voting procedures, in ensuring officials choose the best recipient for donated organs, and in writing insurance policies that provide adequate coverage without inviting misuse. In 2007 and at age 90, the Moscow-born economist was awarded the Nobel in economics, along with Eric Maskin and Roger Myerson, who expanded on the foundation Hurwicz built.

More info

Nobel Prize news release
University News Service Nobel Prize announcement
Profile from the College of Liberal Arts

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